Which Employees are "nonexcludable" for 401(a)(4) testing?

[Lynn Campbell]

Assuming that a small "tiered" Profit Sharing plan- with an "end of the year" allocation requirement - meets 410(B) coverage ratio percentage tests because more than 70% of all NHCES benefit under the Plan - then when contributions are allocated to the groups in the tiered plan, how are the participants who terminated with greater than 500 hours - and therefore do not "benefit" under the Plan - treated for

401(a)(4) testing? Are they ignored completely or counted as having a zero accrual rate? Thanks for input...

[Guest]

the only people you can ever exclude are:

less than age 21

fail one year of service

union

non-resident aliens

terminees

all others are treated as includable and either benefitting or not benefitting.

therefore, in your example, the terminees who have more than 500, but don't get a contribution will show on the test with a 0 accrual.

[MWeddell]

Agreed. With design-based safe harbors, excluding employees who earned less than 1000 hours of service or who weren't employed on the last day of the plan year doesn't present any problems, but when you have to use the general test, Tom Poje states the rules correctly.

[Lynn Campbell]

How does this affect age-based profit sharing plans?

[Guest Doug Goelz]

The same definition of excludable employees applies to age-weighted profit sharing plan as well as to any type of plan. Coverage testing under 410(B) is a requirement that must be passed regardless of what type of plan design you have under 401(a)(4).

In addition, the above comments regarding excluding employees in a plan with a safe-harbor design are not correct. A safe harbor plan is deemed to satisfy 401(a)(4) without needing to do any testing. However, these plans must still satisfy 410(B) coverage testing by using the same definition of excludable employees that Tom points out. You can have a safe-harbor plan that does not pass coverage testing...so be careful.

In addition, one minor detail to excluding terminated employees with less than 501 hours is that they must be eligible to participate in the plan. (If you have an excluded class of employees who have otherwise met the plan's eligibility requirements, they are not excludable when they terminate employment--regardless of the number of hours completed.)

[Guest sdolce]

One further wrinkle that can arise in a top-heavy safe habor plan that has a 1000 hour requirement: a participant who works less than 1000 hours but who is employed on the last day of the plan year must receive a top-heavy minimum allocation even though he doesn't qualify for the plan's regular allocation. In this instance the plan will retain its safe-harbor status only if it passes coverage without the "top-heavy-only" employees considered to be benefitting.If not,the plan will have to pass the general test. See 1.401(a)(4)-2(B)(vi)(D)(3) and (F),example 2

[David]

WRT Doug G.'s post, if you had a safe harbor plan that could not pass the ratio percetage test because of a non-benefiting participant, can you then try to pass coverage with the ave. ben. test and if successful not have to worry about non-discrim. testing because it's safe harbor.

I am actually working on a plan in this situation today. There is also a DB plan, which I believe would have to be included in the ave. ben. test.

[Tom Poje]

Dave:

If I understand your post, you have a safe harbor plan.

You are testing coverage. there are two ways to pass coverage, either Ratio Percentage or Avg Ben Test. doesn't matter which one you use as long as you pass, you pass without having to do a(4) testing as well.

as regards to the DB plan, you are allowed to test the AVG Ben separately, but you have to test the the DC on an allocation basis and the DB on an accrual basis (or have the DB pass ratio %) see 1.410(B)-5(e)(3)

[David]

Thanks Tom.

[Guest lforesz]

Hi,

Just to clarify. If a group of employees is excluded by "class" from a plan (i.e. associate attorneys) but have otherwise met the age/service, then they are "nonexcludable employees" who are included in the cross-test with zero contributions.

However, when we run ADP/ACP testing, we only include employees who benefit under the 401(k)/(m) portion of the Plan. Why the different treatment of nonexcludable under the two tests? Thanks!!

[Tom Poje]

I will make an attempt at an answer - you ask a very good question.

cross testing is done under the general test rules of 401(a)(4) which refer back to 410(B), so you end up including ees who might have been excluded from the plan.

the ADP test (and ACP test) have a special rule 1.401(k)-1(g)(4) - include only those employees who are actually able to defer. someone who is excluded from the plan would be unable to defer, hence not included in the ADP test.

Of course, the plans could be aggregated for ADP test, but then you would aggregate for coverage as well.

[Guest lforesz]

Ah hah! I see. So, then ADP/ACP testing has a special rule, but the general rule for 401(a)(4) testing is to include all nonexcludables even if they are excluded from the portion of the plan being tested. It actually helps us because the excluded associates are HCEs. Please confirm that this is right.

Thanks!!

[Guest Tom Geer]

If some or all of the associates make enough, try making them noncovered HCEs by dropping the 20& rule in the HCE deifinition. We did that at my old firm, used the ABP test, and by the time we applied the midpoint percentage to the HCE coverage rate, we had absolutely no problems passing.

[Tom Poje]

Lori:

maybe another example or 2 would help.

Suppose an ee makes a one-time irrevocable election not to participate in the 401(k) plan. Hopefully, you would agree the employee is not included in ADP testing, but is treated as includable and not benefiting for coverage.

Suppose there are separate 401(k) plans for memebrs of a controlled group. When perfoming the ADP test, the employees of the other plan are not considered. BUT BE CAREFUL! you still have to pass coverage by treating the other employees as includable and not benefitting, and if you have to aggregate to pass coverage you have to aggregate for ADP test.

with 401(a)(4) , these people are actually show up with big fat 0s rather than being excluded. I guess this is found in 1.401(a)(4)-1©(4)...a definition of a 'plan' subject to testing under section 401(a)(4) is the same as the definition to testing under section 410(B), i.e. the plan determined after applying the mandatory disaggregation rules.