Changing eligibilty - nondiscriminatory?

[AlbanyConsultant]

A question similar to this started quite a debate at the ASPPA Annual Conference a few months back, but I don't think there was ever a clear answer...

 

Small plan with immediate eligibility, the participants are the owner, his son, and one non-related worker.  The son was not employed when the plan started  in 2015 (he came aboard in 2016) and has never worked more than 1,000 hours per year.  The company is expanding and now wants to change the eligibility provisions to have 1 Year of Service (1,000 hours).

 

If the plan provision is changed to require a YOS, is the son grandfathered in the plan, or is he now considered an excluded employee (i.e., no future contributions) because he has not met the new eligibility requirements?  Could the resolution (if the adoption agreement itself doesn't give you the flexibility to do it) be written to grandfather him in?  Is that discriminiatory?

 

If the son is terminated (and hopefully paid out) before the change, does it even matter?

 

Thanks.

[RatherBeGolfing]

There was absolutely a clear answer at Annual but some in the audience did not want to accept the answer.

The answer is that if you have immediate eligibility and later change that eligibility to something else, those who have not met the new eligibility are now not eligible to participate. There are no cutback issues here (which is what Brian was saying in his session and Sal confirmed during the general session the next day).

But wait there is more...  If you want the people who are in the plan to stay in, simply make your amendment prospective and you won't have any issues.

As for discrimination issues, you should be fine changing the eligibility within the statutory limits.

 

[KJohnson]

Quote

 

If your amendment grandfathers in the son (who I assume is an HCE by attribution) you might want to look at § 1.401(a)(4)-5.  Not saying it is a problem.  Its a facts and circumstances determination.  The reg provides some examples on the timing of plan amendments and discrimination.  But grandfathering in a class of individuals at a time when only an HCE is in the class being grandfathered might raise an issue.   

[chc93]

7 hours ago, RatherBeGolfing said:

There was absolutely a clear answer at Annual but some in the audience did not want to accept the answer.

The answer is that if you have immediate eligibility and later change that eligibility to something else, those who have not met the new eligibility are now not eligible to participate. There are no cutback issues here (which is what Brian was saying in his session and Sal confirmed during the general session the next day).

But wait there is more...  If you want the people who are in the plan to stay in, simply make your amendment prospective and you won't have any issues.

As for discrimination issues, you should be fine changing the eligibility within the statutory limits.

 

Calendar year plan... immediate entry.  EE hired Oct 2016.  Immediately eligible for plan in Oct 2016.  Now, plan amended/adopted in Jan 2017 to change to 1 yr service.  Are you saying that this EE is not eligible until after 1 yr service (and maybe never)?  I thought an amendment such as this is driven by the adoption date of the amendment, and not an earlier effective date.  So this EE stays in the plan as a participant, even if never work 1000 hours in any year.  Thanks...

[ETA Consulting LLC]

You may amend the plan to say one year of service is required; however, employees hired on or before a certain date would be eligible.  This is a standard selection is most of the prototype documents I've seen.

Good Luck!

[Belgarath]

I agree with RBG.

[RatherBeGolfing]

14 hours ago, chc93 said:

Calendar year plan... immediate entry.  EE hired Oct 2016.  Immediately eligible for plan in Oct 2016.  Now, plan amended/adopted in Jan 2017 to change to 1 yr service.  Are you saying that this EE is not eligible until after 1 yr service (and maybe never)?  I thought an amendment such as this is driven by the adoption date of the amendment, and not an earlier effective date.  So this EE stays in the plan as a participant, even if never work 1000 hours in any year.  Thanks...

It depends on how you do your amendment.  If you simply amend the plan to require 1Y/A21, anyone who has not satisfied the eligibility requirements are not eligible.  It doesn't matter if they are current participants because the plan has immediate entry.  There is no 411(d)(6) issue here.  

Also remember that just because you CAN exclude anyone who does not meet the new requirements doesn't mean that you have to.  You could draft your amendment to only impact new hires.  There are other issues such as discrimination, especially if you have a pattern of amendments in favor of HCEs, but you do not have to grandfather a participant who has not met the new requirements.

 

[david rigby]

41 minutes ago, RatherBeGolfing said:

You could draft your amendment to only impact new hires. 

 

It's common for plan amendments to have prospective-only effect (in some cases, mandatory).  Well-written plan amendments will address this issue up front, to remove ambiguity. 

[RatherBeGolfing]

21 minutes ago, david rigby said:

It's common for plan amendments to have prospective-only effect (in some cases, mandatory).  Well-written plan amendments will address this issue up front, to remove ambiguity. 

Absolutely, it all depends on what you want to accomplish.  

I do think it is important to point out that you do not have to do it prospective only though, as there seem to be some confusion in this area.  Of course, just because you can does not mean that you should.

[Tom Poje]

for example, typical language might be something like

 

Eligibility is upon completion of 1 year of service ......

However, any Employee who was a Participant in the Plan prior to the effective date of this amendment and restatement shall continue to participate in the Plan.

[AlbanyConsultant]

Thanks, everyone.

[chc93]

9 hours ago, RatherBeGolfing said:

It depends on how you do your amendment.  If you simply amend the plan to require 1Y/A21, anyone who has not satisfied the eligibility requirements are not eligible.  It doesn't matter if they are current participants because the plan has immediate entry.  There is no 411(d)(6) issue here.  

Also remember that just because you CAN exclude anyone who does not meet the new requirements doesn't mean that you have to.  You could draft your amendment to only impact new hires.  There are other issues such as discrimination, especially if you have a pattern of amendments in favor of HCEs, but you do not have to grandfather a participant who has not met the new requirements.

 

 

4 hours ago, Tom Poje said:

for example, typical language might be something like

 

Eligibility is upon completion of 1 year of service ......

However, any Employee who was a Participant in the Plan prior to the effective date of this amendment and restatement shall continue to participate in the Plan.

RBG... as you say, there is some confusion in this area, and I'm still a bit confused.

(bold/underline) in your post... are you saying that an employee who met the immediate eligibility and is a participant, can now be un-participated (word?) when the 1-year requirement is implemented?

Tom's post above looks to be like a prospective application... which is what I would think I would do.

I wasn't aware that I could un-participate an immediately eligible participant who didn't meet the 1-year requirement when implemented.

Thanks...

[RatherBeGolfing]

18 hours ago, chc93 said:

 

RBG... as you say, there is some confusion in this area, and I'm still a bit confused.

(bold/underline) in your post... are you saying that an employee who met the immediate eligibility and is a participant, can now be un-participated (word?) when the 1-year requirement is implemented?

I wasn't aware that I could un-participate an immediately eligible participant who didn't meet the 1-year requirement when implemented.

The short answer is yes, you can "un-participate" an employee who has not met the eligibility requirements (or by excluding the employee by classification), even if you let them participate in the plan when you had less restrictive requirements.  There is no protected right to continued participation.  

From the 2017 EOB (Ch 2, Section VI, Part E)

Quote

Just because an employee qualifies as a participant in the plan does not guarantee the employee the right to participate in the plan for the rest of his employment with the employer... The anti-cutback rule under IRC §411(d)(6) only protects the employee's benefits that are already accrued. It does not guarantee the right to accrue additional benefits in the future... The right to continue to participate in a plan is not a protected benefit. Accordingly, an employee's status as an active participant in the plan can be eliminated by modifying the eligibility requirements in a way that the employee is no longer satisfying the requirements for participation. When active participant status is eliminated, the participant's accrued benefit is protected, but the employee will not accrue additional benefits until he or she first re-establishes the right to participate in the plan under the modified eligibility requirements.

If you don't want to exclude current participants who have not met the new eligibility requirements, simply make the amendment prospective.  Keep in mind that this could create a discrimination problem if it favors HCEs.

I hope that helps.

[coleboy]

Hi,

Silly question but what do you mean by prospective?

[RatherBeGolfing]

3 minutes ago, coleboy said:

Hi,

Silly question but what do you mean by prospective?

no retroactive applicability, anyone in the plan will stay in the plan even if they don't meet the new eligibility.

[coleboy]

We took a plan over as of 4/1/16. They had immediate eligibility but wanted to change it to 1 year as of 1/1/16. As I'm beginning the year-end testing, I realized that they never specified whether they wanted everyone who was eligible under the immediate provision to continue to participate or whether they wanted to just start anew. It would've have been an issue except someone that started 3/1/16 actually started contributing. We didn't take it over until 4/1/16. Restated the document as of that date but the 1 year requirement was done to start 1/1/16. Trying to figure out how to handle.

[RatherBeGolfing]

21 hours ago, coleboy said:

We took a plan over as of 4/1/16. They had immediate eligibility but wanted to change it to 1 year as of 1/1/16. As I'm beginning the year-end testing, I realized that they never specified whether they wanted everyone who was eligible under the immediate provision to continue to participate or whether they wanted to just start anew. It would've have been an issue except someone that started 3/1/16 actually started contributing. We didn't take it over until 4/1/16. Restated the document as of that date but the 1 year requirement was done to start 1/1/16. Trying to figure out how to handle.

Participant A enters 3/1/16 when plan had immediate eligibility

On 4/1/16 the plan is amended to require 1 year of service for anyone hired after 12/31/2015

As of 4/1/16, Participant A is no longer eligible to participate until s/he satisfies 1 year of service.

Did the plan allow A to keep participating after 4/1/16? 

[chc93]

On 2/18/2017 at 10:11 AM, RatherBeGolfing said:

The short answer is yes, you can "un-participate" an employee who has not met the eligibility requirements (or by excluding the employee by classification), even if you let them participate in the plan when you had less restrictive requirements.  There is no protected right to continued participation.  

From the 2017 EOB (Ch 2, Section VI, Part E)

If you don't want to exclude current participants who have not met the new eligibility requirements, simply make the amendment prospective.  Keep in mind that this could create a discrimination problem if it favors HCEs.

I hope that helps.

RBG... very helpful.  Thank you very much.

 

[chc93]

On 2/20/2017 at 6:23 AM, coleboy said:

We took a plan over as of 4/1/16. They had immediate eligibility but wanted to change it to 1 year as of 1/1/16. As I'm beginning the year-end testing, I realized that they never specified whether they wanted everyone who was eligible under the immediate provision to continue to participate or whether they wanted to just start anew. It would've have been an issue except someone that started 3/1/16 actually started contributing. We didn't take it over until 4/1/16. Restated the document as of that date but the 1 year requirement was done to start 1/1/16. Trying to figure out how to handle.

 

6 hours ago, RatherBeGolfing said:

Participant A enters 3/1/16 when plan had immediate eligibility

On 4/1/16 the plan is amended to require 1 year of service for anyone hired after 12/31/2015

As of 4/1/16, Participant A is no longer eligible to participate until s/he satisfies 1 year of service.

Did the plan allow A to keep participating after 4/1/16? 

RBG... Participant A not only entered 03/01/16, but actually started 401k deferrals.  As of 04/01/16, does Participant A now have to stop 401k deferrals (no longer eligible to participate) until 1 year of service completed, or can continue with the 401k deferrals.

[RatherBeGolfing]

1 hour ago, chc93 said:

 

RBG... Participant A not only entered 03/01/16, but actually started 401k deferrals.  As of 04/01/16, does Participant A now have to stop 401k deferrals (no longer eligible to participate) until 1 year of service completed, or can continue with the 401k deferrals.

Participant A is not eligible to participate as of 04/01/16.  Whether they started contributing doesn't matter for eligibility.  A has a balance but cannot continue deferring until the new eligibility has been met.

A couple of incidental notes:

For purposes of the 5500, A still counts as a participant, but not an active participant

Since A has a balance, s/he must receive all applicable notices, disclosures and statements such as SMMs, SPDs, etc...

[chc93]

45 minutes ago, RatherBeGolfing said:

Participant A is not eligible to participate as of 04/01/16.  Whether they started contributing doesn't matter for eligibility.  A has a balance but cannot continue deferring until the new eligibility has been met.

A couple of incidental notes:

For purposes of the 5500, A still counts as a participant, but not an active participant

Since A has a balance, s/he must receive all applicable notices, disclosures and statements such as SMMs, SPDs, etc...

RBG... Again, thank you very much.

[RatherBeGolfing]

You are very welcome