Service Based Exclusions

[LANDO]

I have a plan that excludes "full-time students", and then goes on to define "full-time students" as follows: an Employee is a full-time student for any period during which the Employee is enrolled as a full-time student or is between academic years/terms at an educational institution and there is reasonable assurance the Employees will be a full-time student the next academic year/term.

The plan does not include a 410(a) failsafe for eligibility, so I assume someone thought this would be a reasonable business classification not based on service.

I am just digging into this, and am trying to figure out what I need to know to evaluate this. Do I need to know if there are both full and part-time employees that fall into this classification? Seems that even classifications that end up excluding only part-time employees could still be legitimate business classification...for example, all the employees at location A are part-time and the plan excludes location A employees.

Since the employer/plan sponsor wouldn't have any control over whether an employee is a full-time student, how can this be a legit business classification? What if a full-time student decided not to go back to school, when would they enter the plan?

Can someone help me get my head around this one?

[K2retire]

Is the employer a school? I have a non-profit university plan that excludes student employees as a valid business classification.

[LANDO]

Nope, this is a for for profit C-Corp with a regular old 401(k) plan. I did find the rules for students not subject to FICA, but this isn't that. I am just struggling with figuring out what factors to apply to decide if an exclusion might be a disguised service based exclusion. Seems like excluding "Students" might just be a backhanded way of saying short duration, or part-time, but I'm not sure how to go about evaluating that.

[austin3515]

That is really odd. I think it is valid because it is not based on service for the Employer. But how do you find out who is a college student? How could you possibly enforce it? That would be my concern. What if they drop out and forget to tell you? What if they were not in college before, but subsequently enroll, and forget to tell you (or intentionally withhold the information?).

The plan should not include criteria that is not based on information it can verify. That is just plain silly.

[LANDO]

I agree that it's administratively unworkable! Sheesh! This is the kind of poop you get when sales people get involved in drafting documents. Can we put this in???...sure fits in the describe line perfectly!

Thanks for putting it into perspective. That makes sense that it isn't related to service with the Employer. I was probably overthinking this one. Never the less, it needs to come out of their PPA restatement.

[austin3515]

^{Maybe "employees who only work between June and August and the month of January" would work....}

[LANDO]

Now you're talkin service based exclusion, in which case I'd be inclined to define them as Interns, or Temporary employees and then just use the 410(a) YOS failsafe provisions. That would be something our VS doc already anticipates. Man I hate describe lines...unless I need them for something.

[austin3515]

Gray area, but you're probably right.

[QDROphile]

One aspect of disguised service-based exclusion should be examined empirically. Look at the excluded group. Does it have a preponderance of limited service employees or some some odd pattern of service? How does that fit with the character of the work that is being performed? For example, on-call employees are often limited- service employees, but significant variations can occur (some may be effectively full time). But the character of their job is different from an employee who is not on-call, even though the actual work that is done by both categories of employee is the same. (e.g. unloading shipments). The IRS has respected the on-call distinction, but I think facts and circumstances will have a lot to do with it. For example, if on-call employees are not eligible for other benefits, such as health benefits, it helps. You can be assured that the scrutiny is higher, so you had better be able to cocme up with a good story and demonstration. Whether or not someone is a full time student is not relevant to character of employment unless the employer is the school or there is some other strange circumstance. If student status empirically coordinates with limited service, I think it will be a tough sell.

[LANDO]

That's what I was concerned about. Seems like what you call it is irrelevant, it has to be what's really going on under the surface that matters. My suspicion is that they may well be trying to link the exclusion to those who are actively enrolled in school/college, which as is pointed out above is impractical, but I also suspect the net effect is to exclude what I would consider to be short duration employees. I know for a fact that some of the employees held out under this exclusion have rehire dates and would have met the 1000 hour YOS definition. However, this is a pretty large plan and I’m sure they have other (non-student) part-time or temporary employees that are not being specifically excluded and come in under their normal service requirements.

[Kevin C]

Seems like what you call it is irrelevant, it has to be what's really going on under the surface that matters.

You're on the right track. The effect of the provision is as important as the wording.

1.410(a)-3(e)Age and service requirements

(1)General rule.—For purposes of applying the rules of this section, plan provisions may be treated as imposing age or service requirements even though the provisions do not specifically refer to age or service. Plan provisions which have the effect of requiring an age or service requirement with the employer or employers maintaining the plan will be treated as if they imposed an age or service requirement. In general, a plan under which an employee cannot participate unless he retires will impose an age and service requirement. However, a plan may provide benefits which supplement benefits provided for employees covered under a pension plan, as defined in section 3(2) of the Employee Retirement Income Security Act of 1974, satisfying the requirements of section 410(a)(1) without violating the age and service rules.

(2)Examples.—The rules of this paragraph are illustrated by the following examples:

Example (1). Corporation A is divided into two divisions. In order to work in division 2 an employee must first have been employed in division 1 for 5 years. A plan provision which required division 2 employment for participation will be treated as a service requirement because such a provision has the effect of requiring 5 years of service.

Example (2). Plan B requires as a condition of participation that each employee have had a driver's license for 15 years or more. This provision will be treated as an age requirement because such a provision has the effect of requiring an employee to attain a specified age.

Example (3). A plan which requires 1 year of service as a condition of participation also excludes a part-time or seasonal employee if his customary employment is for not more than 20 hours per week or 5 months in any plan year. The plan does not qualify because the provision could result in the exclusion by reason of a minimum service requirement of an employee who has completed a year of service. The plan would not qualify even though after excluding all such employees, the plan satisfied the coverage requirements of section 410(b).

Example (4). Employer A establishes a plan which covers employees after they retire and does not cover current employees unless they retire. Any employee who works past age 60 is treated as retired. The plan fails to satisfy the requirements of section 410(a) because the plan imposes a minimum age and service requirement in excess of that allowed by this section.

Example (5). Employer B establishes plan X, which provides that employees covered by qualified plan Y will receive benefits supplementing their benefits under plan Y to take into account cost of living increases after retirement. Plan X is not treated as imposing an age or service requirement.

Example (6). Employer C establishes a qualified plan satisfying the minimum age and service requirements. At a later time, entry into the plan is frozen so that employees not covered at that time cannot participate in the plan. The limitation on new participants is not treated as imposing a minimum age and service requirement. [Reg. §1.410(a)-3.]