Otherwise Excludable Employees and ADP Testing

[EBECatty]

I don't get heavily involved in testing, so am hoping to clarify a point on ADP testing of otherwise excludable employees. I hope I'm asking the right question. 

Say a plan has immediately eligibility for deferrals, but age 21 and one year of service for all other contributions. Entry dates are January 1 and July 1. Plan year is a calendar year. 

An employee is hired in March 2019, works a year of service by March 2020, and enters the plan July 1, 2020. The person's March-December 2019 compensation makes them an HCE for 2020. For 2020 ADP testing, is that person tested as an HCE with the otherwise excludable group or the "regular" (i.e., fully eligible) group?

[BG5150]

How could this person be in the otherwise excludable group in the first place?  Even using the 18-month rule, they would come into the plan in September of 2020.  (Assuming they worked the requisite # of hours and are over age 21)

Side note:  Using the early participation rule, an HCE who has not met the 21/1 threshold can be included in the non-excludable group for ADP/ACP.  But only for those testst; they are still OEX for coverage and other tests.

[EBECatty]

Thanks. I guess that is my question - would they ever be in the otherwise excludable group for 2020?

In other words, if the participant is past the maximum age/service requirements at any time during 2020 (July, September, etc.), are they automatically out of the otherwise excludable group for all of 2020 for purposes of ADP testing?

Again, I'm not very involved in testing but want to make sure I fully understand the impact on plan design. 

[C. B. Zeller]

44 minutes ago, EBECatty said:

Thanks. I guess that is my question - would they ever be in the otherwise excludable group for 2020?

If they had terminated employment prior to their statutory entry date, they would be part of the otherwise excludable group. Once they satisfy statutory eligibility they become part of the "regular" testing group.

46 minutes ago, EBECatty said:

In other words, if the participant is past the maximum age/service requirements at any time during 2020 (July, September, etc.), are they automatically out of the otherwise excludable group for all of 2020 for purposes of ADP testing?

It comes down to the method you are using to test coverage. Since you would normally be testing coverage using the annual method, you test on the last day of the year and include all employees who were not excludable during the year. This person in question met the plan's minimum age and service conditions, so therefore they are treated as non-excludable in the coverage test. When disaggregating otherwise excludable employees, you disaggregate employees who met the minimum age and service conditions under the plan, but not the maximum age and service conditions of 410(a). Since this person had satisfied the maximum age and service conditions of 410(a) during the year, they cannot be part of the disaggregated plan. 

ADP testing follows coverage testing, so the people you disaggregated as otherwise excludables for coverage are your otherwise excludables for ADP.

[EBECatty]

Thank you, C.B. That's exactly what I was trying to understand.

Based on that I assume the answer is yes, but if the same person were hired in, say, September 2019; based on 2019 compensation, became an HCE in 2020; reached a year of service in September 2020; then entered the plan on January 1, 2021, they would be in the otherwise-excludable group as an HCE during 2020?

[C. B. Zeller]

1 minute ago, EBECatty said:

Based on that I assume the answer is yes, but if the same person were hired in, say, September 2019; based on 2019 compensation, became an HCE in 2020; reached a year of service in September 2020; then entered the plan on January 1, 2021, they would be in the otherwise-excludable group as an HCE during 2020?

I agree.

[EBECatty]

Much appreciated!

[BG5150]

1 hour ago, C. B. Zeller said:

ADP testing follows coverage testing, so the people you disaggregated as otherwise excludables for coverage are your otherwise excludables for ADP.

Unless you are using Early Participation rule for the ADP test.  It allows you to test an OEX HCE with the nonexcludables instead.  The rule is only for ADP/ACP and NOT coverage.

Tom posted this clip a few years ago: (emphasis mine) from

(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).)

item A is a special rule that says "Ignore otherwise excludable rule for HCEs

[EBECatty]

Interesting, thanks BG.

If I'm reading that section correctly (1) you must disaggregate coverage testing to disaggregate ADP, but (2) once you have disaggregated coverage, you can either (A) also disaggregate ADP like coverage, or (B) include the otherwise excludable HCEs with the non-excludable group for ADP despite remaining disaggregated for coverage.

[BG5150]

That is my understanding.