Testing "Most" Otherwise Excludibles Separately

[austin3515]

1.410(b)-7©(3) (on testing otherwise excludables separately)

If an employer applies section 410(b) separately to the portion of a plan that benefits only employees who satisfy age and service conditions under the plan that are lower than the greatest minimum age and service conditions permissible under section 410(a),

I have a client who has no good way of knowing how many hours someone worked. Everything is done using elapsed time. Therefore, they have no idea who has and who has no satisfied the "greatest minimum age and service conditions permissible under 410(a). Therefore, if I simply assume everyone is full-time, it is possible that I will be including OE's in my "main test."

Example: Susan works "about" 10 hours a week and contributes her entire paycheck to the Plan. She should not be in the main test. In other words, one cannot assume that the testing would always be hurt by this assumption. We're talking about hundreds of employees, so please don't say "I thought they didn't track hours"

Is there anything that says I can use some alternative method of determining who has not met "the maximum age and service conditions under section 410(a)?"

[My 2 cents]

1. Probably would do no good in this particular instance (assuming that it would not pass), but isn't it optional to split the plan into "main" and OEs?

2. Aren't you concerned that a sponsor who can't track hours accurately and a plan that bases eligibility etc. on hours worked is an operational defect waiting to happen? If they can't do it, the plan should call for the use of elapsed time, not hitting an hours benchmark.

[austin3515]

1. Probably would do no good in this particular instance (assuming that it would not pass), but isn't it optional to split the plan into "main" and OEs?

Sure, but I wouldn't mind splitting if I could because it would help.

2. Aren't you concerned that a sponsor who can't track hours accurately and a plan that bases eligibility etc. on hours worked is an operational defect waiting to happen? If they can't do it, the plan should call for the use of elapsed time, not hitting an hours benchmark.

Per my OP, they used elapsed time for everything precisely because they cannot track hours. Perhaps it could have been misread. My question is, for purpose of determining who is an OE, is my only option to count hours (which is something the client cannot do).

[My 2 cents]

Still, if the plan defines service as elapsed time (as it should when the sponsor cannot track hours), wouldn't you use an elapsed time standard to determine who is an OE under 410(a), not an hours-based standard?

[Tom Poje]

I suppose in an absolute worse case scenario you could divide comp by minimum wage and that would give at least some people who never worked 1000 hours.

[chc93]

Would the "service condition" be defined in the plan document for "year of service". Then if it is elapsed time, that's your benchmark...

[austin3515]

This is the definition of "year of service" found in 410(a). I don't think it defaults to my plan's definition of service.

(3) Definition of year of service

(A) General rule

For purposes of this subsection, the term “year of service” means a 12-month period during which the employee has not less than 1,000 hours of service. For purposes of this paragraph, computation of any 12-month period shall be made with reference to the date on which the employee’s employment commenced, except that, under regulations prescribed by the Secretary of Labor, such computation may be made by reference to the first day of a plan year in the case of an employee who does not complete 1,000 hours of service during the 12-month period beginning on the date his employment commenced.

[austin3515]

I suppose in an absolute worse case scenario you could divide comp by minimum wage and that would give at least some people who never worked 1000 hours.

I still have the same "risk" that Susie Q who has been with the company for 5 years as a 10 hour a week employing, deferring 90% of pay will erroneously be in the "main" test.

[GMK]

I agree you'd have that risk depending on her hourly rate of pay, but why does it matter how much she defers? (just curious)

[austin3515]

It doesn't of course, I'm merely demonstrating that a common assumption (e.g., if you let an OE in the test who doesn't belong, the testing would only be hurt) is not necessarily true. I have seen lots of TPA's base their exclusions on DOH and DOB alone.

[Mike Preston]

Why c an't you use the DOL equivalencies to determine OE?

[austin3515]

Why can I? I certainly like that position. Is it clear anywhere that I can use it for this purpose?

[GMK]

Not sure it will help for Susie Q's case. The daily equivalency is 10 hours if she works at least an hour during the day. Weekly, it's 45 hours if she works during the week. But maybe she works only one day a week, so the 10 hours is OK. You've presented a puzzler here, Austin. Good luck.


http://benefitslink.com/boards/index.php?/topic/21728-calculation-of-hours-of-service-when-employees-are-not-paid-by-the-hour/#.VNKa7-l0xaQ

http://www.irs.gov/pub/irs-pdf/p6388.pdf

[MrKnowItLittle]

You can definitely grab all the low hanging fruit people, under 1 YOS, never met entry date etc. Can you play it safe and include the others? Basically your using OE only looking at it on a elapsed time basis, and disregard the hour component.

[Mike Preston]

1.410(a)-7 has the rules for using elapsed time as it applies to eligibility (and vesting and benefit accrual). If the plan calls for use of elapsed time then the employer should know those rules. What am I missing?

[austin3515]

What I am missing is a clear link between the language of 410(a) (which clearly references the max as 1,000 hours in 12 months) and the use of elapsed time to determine OE's. So for example, if 410a said "if the Plan counts hours, then 1,000 hours in 12 months and if the Plan uses elapsed time, then 12 months" I would have no concern. But it doesn't say that. I'm just surprised that there isn't something clear in the regs that makes this easy to figure out.

[austin3515]

1.410(a)-7 has the rules for using elapsed time as it applies to eligibility (and vesting and benefit accrual).

(ii) Under the alternative method set forth in this section, by contrast, an employee's statutory entitlement with respect to eligibility to participate, vesting and benefit accrual is not based upon the actual completion of a specified number of hours of service during a 12-consecutive-month period. Instead, such entitlement is determined generally with reference to the total period of time which elapses while the employee is employed (i.e., while the employment relationship exists) with the employer or employers maintaining the plan. The alternative method set forth in this section is designed to enable a plan to lessen the administrative burdens associated with the maintenance of records of an employee's hours of service by permitting each employee to be credited with his or her total period of service with the employer or employers maintaining the plan, irrespective of the actual hours of service completed in any 12-consecutive-month period.

I should have read it first. I think this paragraph closes the loop for me. I assume others agree?

[MrKnowItLittle]

Wouldn't 12 months via elapsed time be more generous by default, and in my mind a very reasonable approach? Maybe there is something in the ERISA outline book? There has to be someone using elapsed time who has used the OE approach in testing. And by default, the idea behind using elapsed time is they are not/cannot track hours.