401(k) Plan excluding EE's by Job Title

[Alex Daisy]

A company has both a 401(k) Plan and a 403(b) Plan.

The 401(k) Plan excludes employees by Job Title, such as Director of Finance, and CFO, and CEO from making elective deferrals into the 401(k) Plan.

However they are eligible for the Profit Sharing Contribution.

These employees instead make their deferrals into the 403(b) plan, which excludes any one who is eligible to make deferrals into the 401(k) Plan.

Basically, if the excluded employees were to make maximum deferrals into the 401(k) Plan, it would fail the ADP test. Therefore, they instead are excluded from the 401(k) by Job Title and make the maximum deferral into the 403(b).

The 401(k) Plan is being audited and the Auditor told the client that they need to stop excluding these employees by titles and that group of employees can chose not to make elective deferrals into the Plan, but he said it appears that the client is trying to avoid failing the ADP test.

Does anyone agree that the Plan needs to stop excluding these employees by Job Title?

Any guidance is greatly appreciated.

Alex.

[Lou S.]

I think you might have more problems withe 403(b) exclusions. But I don't really deal with 403(b) so maybe someone else can speak more to that.

A better solution might be to make everyone eligible for both plans and just tell the HCEs, make your deferrals to to to 403(b) or you may get refunds.

Or make everyone eligible for both but limit HCE deferrals in the 401(k) plan to $0 per year thus forcing them to make deferrals to the 403(b).

[Lou S.]

But the exclusions by Job Title don't sound like a problem at all assuming you pass coverage testing which should be easy since those titles are all probably occupied by HCEs.

[Alex Daisy]

Correct, those excluded Job titles are occupied by HCE's. And the Plan does pass coverage.

When I run the ADP test, do I need to include or exclude the HCE's who were excluded by their Job Title from being eligible to defer into the Plan?

[Lou S.]

You leave them out of the ADP test as they were excluded from making deferrals.

[ETA Consulting LLC]

403(b) is subject to universal availability. However, one the exceptions to the universal availability requirements is to exclude any employee who is eligible to defer under another vehicle (i.e. 401(k) or 457(b)). So, by writing the 401(k) to exclude the CEO, CFO, and Director of Finance, you achieve two things:

Have them excluded from the ADP test in the 401(k) plan while having them as the only employees who may defer under the 403(b) plan.

I cannot detect an issue on the surface.

Good Luck!

[Peter Gulia]

When the employer established these plan provisions, did it also receive a practitioner's written opinion or advice that the coverage and non-discrimination results are those the employer desired? If so, might the employer choose to reveal that writing to the auditor?

[Alex Daisy]

Yes, when the employer established these plan provisions, they did receive a practitioner's written opinion, but at that time, there were no other HCE's in the 401(k) Plan except those that were excluded by Job Title.

In subsequent years, other employees fell into the HCE category that were not specifically excluded from the 401(k) Plan by job title.

Regarding Universal Availability, if the 401(k) covered ALL EMPLOYEES, and the 403(b) Plan is only made available to the Highly Compensated Employees, does this Satisfy the Universal Available rule?

The 401(k) and 403(b) both have immediate eligibility.

[ETA Consulting LLC]

If the 401(k) Covered ALL EMPLOYEES, and your 403(b) contains a provision excluding employees covered under another arrangement, then the 403(b) would, in effect, exclude ALL EMPLOYEES. You would either exclude this class or not. You cannot exclude all employees other than HCEs on the basis that those employees are eligible to defer under another arrangement when the HCEs are eligible to defer under than arrangement as well.

Hope this helps.

Good Luck!

[Alex Daisy]

So, my scenario would violate the Universal Availability rule?

401(k) Covers all employees

403(b) only covers HCE's

[pholosofizer]

I don't see any problem with the setup, it seems like a great idea.

Why not just have a 403(b) only though? Is there a match made that would require ACP testing as well?