Otherwise Excludable HCEs on ADP Test

[ratherbereading]

Good morning. I have a plan with 45 HCEs. The plan has immediate entry for 401k. When I test the Otherwise Excludable employees (includes 4 HCEs) separately the test fails. I have 2 questions:

1. Can an HCE be an Otherwise Excludable employee? The McKay Hochman website seems to say No.

2. If HCEs can be an Excludable Employee, do they take a refund, or do I just go with the Non-excludable test, which passes?

Thanks in advance!!

[rcline46]

Are you saying that when you test all 45 together the test passes? If so stop, do not go to other wise excludable testing.

If you are saying that the 'normal' test only passes by using the OEE, then do the give back to the HCEs in the OEE test.

HCEs by code cannot be OEE, but the regulations permit it, so which works best is what you use.

[Tom Poje]

I would word it this way:

The regulations are as follows
1.401(k)-2(a)

(iii) Special rule for early participation. If a cash or deferred arrangement provides that employees are eligible to participate before they have completed the minimum age and service requirements of section 410(a)(1)(A), and if the plan applies section 410(b)(4)(B) in determining whether the cash or deferred arrangement meets the requirements of section 410(b)(1), then in determining whether the arrangement meets the requirements under paragraph (a)(1) of this section, either—

(A) Pursuant to section 401(k)(3)(F), the ADP test is performed under the plan (determined without regard to disaggregation under § 1.410(b)-7©(3)), using the ADP for all eligible HCEs for the plan year and the ADP of eligible NHCEs for the applicable year, disregarding all NHCEs who have not met the minimum age and service requirements of section 410(a)(1)(A); or

(B) Pursuant to§ 1.401(k)-1(b)(4), the plan is disaggregated into separate plans and the ADP test is performed separately for all eligible employees who have completed the minimum age and service requirements of section 410(a)(1)(A) and for all eligible employees who have not completed the minimum age and service requirements of section 410(a)(1)(A).

In other words, you have a choice

1. All HCEs and only those NHCE who are not otherwise excludables (there is no reason to run an otherwise excludable test as their are no HCEs

2. Split the test into 2 - All who met 1 yr/age 21 and another test with all otherwise excludables (including OE HCEs) you have 2 tests, refunds in one test are not really related to refunds in another test.

can't speak for other software, but

Relius coding option 1 would be 'carve out' - you carve out all the HCEs and just those NHCEs who have met the 1 yr age 21

option 2 would be 'test separately' because you are indeed testing two groups separately

.......................

by the way, there is no similar rule for purposes of Coverage