Excludable Employees

[bzorc]

A new company has 20-30 office workers, and 700 or so "laborers" who are paid on an hourly basis and are "provided" to various other businesses for their use. The hourly employees are paid by the new company as W-2 wages.

The new company would like to establish a retirement plan for the office workers and exclude the hourly "laborers", as the owner feels that these employees would not want to take advantage of the plan. In addition, the owner does not want the expense of an audit that would come along with 700+ eligible employees.

Question is can these employees be specifically excluded? I am currently in the PPA restatement phase for current plans and see that the prototype document I am using allows an exclusion for "Employees that are paid on an hourly basis". If this is allowable, I might have to have a new conversation with our new company CFO...

Thanks for any replies.

[BG5150]

Sure you can exclude hourly workers.

However, if a decent portion of them work more than 1,000 hours in any year, you will have a coverage problem.

Or, you can just exclude a lot, if not all, the HCEs.

[My 2 cents]

Sure you can exclude hourly workers.

However, if a decent portion of them work more than 1,000 hours in any year, you will have a coverage problem.

Or, you can just exclude a lot, if not all, the HCEs.

Of course, if the "laborers" are covered by a collective bargaining agreement under which retirement benefits were the subject of good faith negotiations (hey - it could happen), they need not be taken into account for coverage purposes and there would thus be no coverage problem.

[austin3515]

No offense but if you're drafting documents for clients and have that question, then I sure hope someone who knows this rule is helping you out. I'm not saying it to be critical - only because you can really get burned if you don't know this stuff cold.

[Jim Chad]

Austin and MY 2 cents brought up 2 key questions.

1. Are they covered by a collective bargaining agreement where retirement benefits were part of the negotiations? and 2. How many of each group are HCE?

next questions are:3. how is this expected to change in the next few years?

4. do you have a TPA that is going to watch this and look ahead?

As Austin said there are many ways you could get burned. I have seen this tried and I have been called in to fix it when it blew up. And, also, I have successfully done this kind of thing.

If you would like to talk about this on the phone, my number is 616-284-5285.

[BG5150]

My suggestion is that if you want to give out your phone number, do it only via private message given the preponderance of spam we are subject to from time to time...

[bzorc]

There is no CBA involved in this plan. I know that if you exclude the hourly employees you open up the coverage testing issues. In this situation the majority of the hourly employees work greater than 1000 hours, hence the question. My original thought was that the company should not adopt a plan due to the coverage (and more importantly the audit) issues imposed by the hourly employees being excluded.

Austin, I have been drafting plans for 25 years. It's just the first time with the PPA restatements in the adoption agreement that the exclusion for hourly employees has been so noticeable. However, in going back to the EGTRRA restatements this exclusion is clearly there as well. Just a big ol' brain spasm on my part....

[My 2 cents]

It has always been OK to exclude hourly employees from a plan if doing so does not cause coverage, non-discrimination or participation issues.

If there are hundreds of excluded employees who don't meet the regulatory standard for being considered excludable and only a couple dozen employees who would benefit, how could you hope to pass the 401(a)(26) requirements? Given that the intention is apparently to provide nothing to the hourly people, how could you hope to pass coverage? It is unlikely that the average benefit test could be passed.

Is it not the case that the compliance rules are designed to stop employers from setting up plans benefiting a small, select group of employees without making adequate provision for the others? The favorable tax treatment may make it more palatable to spend the money on an annual audit and benefits for rank and file employees, but if the only real objective is to set up retirement savings for a small subgroup, it needs to be recognized that a qualified plan is not necessarily going to be "efficient" on an after tax basis. This is not the same thing as saying that establishing a plan is a bad idea.

[ETA Consulting LLC]

The documents are constantly being written for enhanced convenience, but certain rules (i.e. coverage) are pretty constant. Sometimes, when you hear a question without the context, it makes you start to wonder; 'wait a minute, why is a mechanic asking me for instructions on how the change a spark plug'. Obviously, that would be a bigger issue giving the propensity of problems in this particular area.

With that said, I've noticed these changes in the documents. They used to provide only the options that were 'statutory excludable', but now seem to provide for many more. Then again, I've seen the 'leased employee' line for many years; and they're not statutory excludable (barring the 414(n)(5) plan).

Good Luck!

[austin3515]

how could you hope to pass the 401(a)(26) requirements?

This doesn't apply to 401ks I know you know that My2Cents...

Given that the intention is apparently to provide nothing to the hourly people, how could you hope to pass coverage

By excluding all of the HCE's

[My 2 cents]

how could you hope to pass the 401(a)(26) requirements?

This doesn't apply to 401ks I know you know that My2Cents...

Given that the intention is apparently to provide nothing to the hourly people, how could you hope to pass coverage

By excluding all of the HCE's

Thank you. I guess my defined benefit plan focus was showing.

Was it mentioned anywhere in the previous posts that the plan would be a 401(k) plan (or is that implicit)? If the only way to set up a new plan was to exclude all HCEs, would the employer still be interested in setting up a plan?

[austin3515]

IF the employer wants to provide a reasonable benefit at minimal cost, then you bet. They can at least do an IRA.

[Kevin C]

We got a new client late last year who set up a plan as described in the OP in 2012 with another TPA. They asked if the design would be a problem and say they were told there would be no problems. When the prior TPA was finishing up the 2012 year in October 2013, they realized the plan failed 410(b) and calculated a correction of $40,000. For 2013, they calculated a correction of $140,000.

We amended the plan effective 1/1/14 to include everyone and they stayed with the SH match. Out of 70+ hourly employees now eligible, only 7 are deferring. Yes, they provided enrollment forms, notices and the SPD to everyone.

Maybe that audit fee doesn't seem so bad now?

[My 2 cents]

Probably tastes better than corrections of $180,000 in little more than a year!

[austin3515]

Wasn't someone saying something about getting burned really badly if you don't know the rules

[BG5150]

Was it mentioned anywhere in the previous posts that the plan would be a 401(k) plan (or is that implicit)? If the only way to set up a new plan was to exclude all HCEs, would the employer still be interested in setting up a plan?

Maybe because the thread is in the "401(k) Plans" forum?

[My 2 cents]

Was it mentioned anywhere in the previous posts that the plan would be a 401(k) plan (or is that implicit)? If the only way to set up a new plan was to exclude all HCEs, would the employer still be interested in setting up a plan?

Maybe because the thread is in the "401(k) Plans" forum?

This is the sort of thing that happens when those of us with 11 months' worth of brains try to do things in December!