Rate Group Testing

[jpod]

Profit Sharing Plan (no 401k feature) by its terms excludes the three shareholders/HCEs. There are other HCEs eligible. In performing basic rate group testing under the general 401(a)(4) test in the regulations, can you count the three excluded HCEs in the rate group analysis?

[My 2 cents]

If they are excluded from the plan, then they are 3 HCEs not in any given rate group (I think).

Example: Say there are 30 HCEs in all (including the 3) who are not excludable (exclusion from the plan does not make someone excludable*). If 15 HCEs are in a specific rate group, and these 3 plus another 12 (out of the total of 30) are not, then HCE coverage percentage for the rate group is 50% (15 in out of 30 HCEs). I think.

*Only things like too young, not enough service, non-resident alien etc. make someone excludable. Being in a group ineligible for the plan does not.

[jpod]

Obviously they are not in any rate group as such, but if they are counted in the denominator in your example that sounds like a "yes" to my question: In determining whether the rate group satisfies 410(b) you count them in the denominator.

[Mike Preston]

Yes.

[ETA Consulting LLC]

(exclusion from the plan does not make someone excludable*).

*Only things like too young, not enough service, non-resident alien etc. make someone excludable. Being in a group ineligible for the plan does not.

Thank you! I was actually getting ready to make that clarification, but you already made it. I was actually trying to decide how to articulate it, but you did it exceptionally well :-)

I was thinking "being excluded from the plan doesn't necessarily make you excludable from testing"; but that would've muddied the waters even more without the additional "age/service or statutory excludable" language :-)

Good Luck!