Excluding certain HCEs by name and a rate group question

[ldr]

Good morning to all,

We have a client, a medical practice, with one owner-doctor, 100%, and two non-owner doctors, along with some rank and file employees.  The plan was set up to exclude "non-owner doctors" from eligibility to participate in the plan.  All the doctors are HCEs.

Now, the owner-doctor would like to make an offer of employment to a new non-owner doctor and he wants to make the plan available to just this new non-owner doctor but not the two non-owner doctors he already has.

We were thinking about amending the plan to simply exclude the two existing non-owner doctors by name.  As we have never done that before, we are not 100% comfortable doing it without asking the advice of the experts.  Would you do it that way or is there another technique?

As an aside, every year when the rate group testing is done for the new comparability profit sharing contribution, our software includes the two existing non-owner doctors in the test, even though they are not eligible to participate in the plan.  We are not 100% comfortable with that, either, and would like to know if this is really right.  The fact that they are HCEs and they do not get a contribution helps to pass the tests and that doesn't really seem "fair" but if it is permissible, we will continue to take advantage of it.

Thank you in advance for your advice!

 

 

[C. B. Zeller]

Your software is doing the right thing. Despite the fact that they are excluded by class from participation, they are non-excludable in 410(b) terms and therefore are counted in the rate group test.

As to your first question, it is certainly permissible to exclude one or more employees by name. The only limitation is that you can not use that classification to satisfy the reasonable classification piece of the average benefits test, but that is never going to be an issue as long as you are only excluding HCEs.

The other drawback of excluding people by name is that they are going to have to keep amending their document every time they hire a new doctor that they don't want to be eligible. Of course, this might be a benefit for you depending how your firm charges for plan amendments. ?

[ldr]

Thank you, C. B. Zeller.  The software provider had told us that it was okay to have them in the rate group test but we were still uneasy about it and now we can stop worrying about that.

Thanks also for the confirmation that it is okay to exclude those non-owner doctors by name.  We do charge for amendments, though not an exorbitant amount, and I don't suppose the practice will grow so very fast that this would be a consideration more than once a year.

 

[Larry Starr]

7 hours ago, ldr said:

Thank you, C. B. Zeller.  The software provider had told us that it was okay to have them in the rate group test but we were still uneasy about it and now we can stop worrying about that.

Thanks also for the confirmation that it is okay to exclude those non-owner doctors by name.  We do charge for amendments, though not an exorbitant amount, and I don't suppose the practice will grow so very fast that this would be a consideration more than once a year.

 

You got the right answers above. However, you can solve your problem of the new doc being eligible by still excluding all non-owner docs  EXCEPT this one (by name).  Then, all new non-owner docs continue to be excluded and they only need to amend if there is one that they want to allow in.  If they expect that it will be unusual to allow any other docs in, then this works with no additional amendments.  FWIW.

BTW, we exclude or limit max allocations to HCEs by name ALL THE TIME.

[ErnieG]

Has the Doctor owner considered a non qualified approach in this situation for this non owner Dr.?  That may be more attractive with more flexibility.

[Larry Starr]

2 hours ago, ErnieG said:

Has the Doctor owner considered a non qualified approach in this situation for this non owner Dr.?  That may be more attractive with more flexibility.

Hopefully if he considers it he will reject it. Seems to me it offers less attraction (the contributions are not tax deductible) and I'm not sure what more flexibility there is when I can do pretty much anything I want with that HCE from the standpoint of giving him full benefits under the plan provisions or limiting those benefits to something smaller.  Plus, the doc has the protection of ERISA.  What do you see as something that is more attractive?

[ldr]

Thanks as always, Larry Starr.  I thought about your approach, too, but I don't know enough about the client, his anticipated hiring patterns, etc.  

I will mention this to the person who actually has the plan and see what he wants to do.  Meanwhile it's a comfort to know that it's common practice to exclude by name if we need to do it.