Exclusion of Interns

[rocknrolls2]

I have a situation where a client wants to categorically exclude interns from participation in a 401(k) plan. Before posting this, I came across a thread between 2010 to 2011 on the subject and whether suh an exclusion could be viewed as a violation of Code Section 410(a) as imposing an indirect service requirement. I am not completely confident that this could completely avoid the issue but could an employer adapt language used to exclude independent contractors from the plan to interns? Namely, any individual who is classified by the employer as an intern and has entered into a written agreement with the employer providing that such individual is excluded from the employer's employee benefit plans? r

[Mike Preston]

If the net effect of the language you add is that interns who stick around long enough that they are excluded beyond the statutory eligibility date and then magically become participants when their status changes from intern to non-intern you are hosed. It is effectively designing the plan with a waiting period longer than statutorily allowed.

[Bill Presson]

Our plan excludes interns this way: "interns hired for a period not expected to exceed 180 days"

If they become full time employees or if they work 1000 hours in a 12 month period, they enter the plan.

As a large CPA firm, we have a lot of intern turnover/transition.

[rocknrolls2]

However, please note that the Code allows employers to cover a "reasonable classification of employees." If interns are not defined by reference to a duration of time or hours worked per any period of time, you might be able to hang your hat on this, especially if the employer develops reasonable criteria for classifying interns. One possibility might be to develop a program with hr recruiting which ties in to regional colleges and universities and provides employment for these individuals for a semester or trimester or less, so that they can write a paper summarizing their experiences to their professor to get a grade and have periodic meetings with interns at that institution to compare notes, and allow enough free time at the end so they can concentrate on their final exams. If you develop the classification in that manner, the exclusion should hold up. If you hire the person as an employee, however, his/her service as an intern must be counted for benefits purposes.

[Mike Preston]

And if you routinely hire those people as employees and their entry dates end up being later than the statutory entry date you have a defacto violation of 410(a). Satisfying 410(b), whether by reasonable classification or no, doesn't cure a 410(a) violation.

[Peter Gulia]

If one is concerned that the Internal Revenue Service might disagree with an employer's interpretation that a job classification is not a disguised service condition, could one file a Form 5307 application for a determination?

[Mike Preston]

I'm pretty sure that 410(a) is an operational violation from which a 5300 or 5307 provides no protection.

[Peter Gulia]

Thank you for the helpful observation.

Internal Revenue Code section 410(a)(1)(A) states: "A trust shall not constitute a qualified trust under section 401(a) if the plan of which [the trust] is a part requires, as a condition of participation in the plan, that an employee complete a period of service ...."

If the employer had highlighted and fairly explained the issue and the facts in its application; the IRS delivered a clean determination that the plan in form is tax-qualified; the previously disclosed facts of the employer's business operations did not change; and the employer administered the plan according to its terms and in the way the employer had previously explained to the IRS, shouldn't the employer get some "credit" for having acted in good faith?

[Mike Preston]

There is simply no way to disclose the fact that the plan, as operated, does so with a disguised 410(a) violation.

[Peter Gulia]

Thank you for the yet more helpful observation.