Eligibility/exclusions

[Belgarath]

Sometimes a tricky subject. Suppose you have a business that has a large majority of employees who might work anywhere from 500 hours to 1400 hours. The business would like to set up a plan that EXCLUDES ALL the H/C employees, as well as ALL the employees in the 500 to 1400 hour classification, and only covers the rest of the employees, who, (purely coincidentally) are full time. Don't really have any demographics or job classifications/functions yet.

The guidance on this is a little strange. Under 401(a)(5) for example, there would be no problem with excluding all these employees IF they here all hourly. If all the rest are salaried, then everything is clean.

On the other hand, under 1.410(a)-3(e)(1) you can't have an exclusion category that would "indirectly" impose an impermissible age or service condition. And you have QAB FY-2006-3 which give s some guidance.

Suppose you have an exclusion category that says anyone earning W-2 compensation of less than "x" is excluded. And everyone earning less than "x" isn't in the full-time category. This would not appear to pass the "smell" test, even though if everyone earning less than "x" was hourly, it would be perfectly acceptable to exclude them as hourly.

It appears that if the exclusion category doesn't relate to service, that it is generally acceptable. So would you say that using a salary level is acceptable? I keep returning to 1.410(a)-3(e) on this, but I think this doesn't ultimately impose an age or service requirement. I've just never seen a plan do this.

Thoughts?

[CuseFan]

It is aggressive, but I have seen designs that exclude people on the basis of compensation - whether an exclusion of those earning above or below a certain amount.

[Peter Gulia]

For situations that involve uncertainty about the law or about the law’s application to a set of facts, lawyers are trained to go to one’s client for a conversation about how much uncertainty and risk the client is comfortable with and how to manage possible interpretations or applications.

 

Perhaps the practical world of documenting an IRC § 401(a) plan might help you frame a similar discussion.

 

Would the plan be stated using a preapproved document?

 

Consider whether your client’s desired provisions can be stated within the adoption agreement’s check-off-box choices.  If instead a provision would be stated by “free writing” on a blank line, how much confidence can you muster in telling your client (whether expressly, or impliedly) that the provision follows the “parameters” the preapproved package allows for that line?

 

Or if your client’s desired provisions would not “color within the lines”, is your client ready to pay for an individually-designed document, and for your advocacy in persuading the IRS it states a plan that, in form, tax-qualifies?

 

[Belgarath]

Thanks. Yeah, like I said, at this point, don't really have any good data - just a general expressed "desire" on a potential plan. Once we actually have specifics on employment classifications, etc., etc. then we may be able to narrow this down. And yes, if questionable we would, as always, recommend ERISA counsel. I'm just trying to think ahead to some possibilities.

[david rigby]

I'm wondering about the communication.  Telling the employee base that "...anyone earning W-2 compensation of less than "X" is excluded", is not a pleasant message.  (BTW, you don't know W2 comp until the end of the year, so that looks like a message of ambiguity, at least for some.)

Seems like you would want to use some type of job classification.  Or is this irrelevant?

[Belgarath]

I would LOVE a job classification(s) that work. As I said earlier, however, I've got no good information at this point, and I'm operating on a mostly theoretical basis until then. Thanks.