Otherwise Excludable Employees

[Becky Schwing]

Does the Otherwise excludable employee provision consist of two options:

1. Otherwise Excludable Employees - where any employee HCE or NHCE is removed from testing - thus two tests - one for everyone meeting max age & service and one for those who are otherwise excludable under max age and service.

2. Early Participation rule - where you only exclude the NHCE's who have not me max age and service but would keep any HCE who has not met max age and service in the testing with everyone who met max age and service.

 

[bvhea]

No, if you exclude the NHCE's who have not met the max age and service, you must test them with the HCE's who have not met max age and service. You either exclude all who have not met age and service or include all who have not met age and service.

[Bri]

Are you referring to the ADP/ACP tests, or general coverage/nondiscrimination?

For coverage and the average benefits test, doing two tests mean the statutory exclusions, both HCE and NHCEs, get tested separately from everyone else.

For the ADP test, you have two choices.

a)  Do the exact same division, running two sets of tests

b)  Do a "carve-out" - That's where the excludable NHCEs are left completely out of the one test you'll run.  But any excludable HCEs stay in the test with all the HCEs who had already met the statutory 1 year/21 requirements

[BG5150]

Bri got it right

[bvhea]

I agree that Bri is correct. However, I still don't understand why the "carve out" is allowed as it allows for discrimination in favor of HCE's that normally would not be allowed in any other testing.

[Mr Bagwell]

47 minutes ago, bvhea said:

I agree that Bri is correct. However, I still don't understand why the "carve out" is allowed as it allows for discrimination in favor of HCE's that normally would not be allowed in any other testing.

Not sure I agree with that because the carve out allows the plan to either use the HCE in with the other HCEs or to be used with the separate testing.  This can be advantageous because maybe the plan can use a low ADP % to drag down the overall ADP %.  Or maybe a high ADP % can be drug down by the other HCEs.  

Not really different if you have a great number of employees that are potential excludables that defer well.  These might help the plan pass ADP for everyone rather than just being in the excludable testing.

Or the potential excludables defer rather poorly and using carve out helps the ADP test pass or reduce refunds.

I see it as flexibility more than anything else.

[bvhea]

The discrimination is evident when you have an HCE who has not satisfied mas age and service and has a high ADP, while there are enough NHCE's that are carved out whose ADP's if included would cause the plan to fail. There is also what I would call discrimination, when an HCE who has not satisfied max age and service and has a very low ADP is used to pass testing while similarly situated NHCE's are carved out. The ADP and ACP tests are the only tests for which this selective exclusion of only NHCE's is permitted.

[Mike Preston]

Don't look a gift horse in the mouth.

[BG5150]

Drop a line to your local Congressman/woman and ask them to change the rules...

[rocknrolls2]

I did want to make one clarification that might make this easier to swallow. Remember, we are talking about a plan that either has immediate eligibility or requires that the employee have attained an age lower than 21 and/or have completed less than one year of service to participate. All participants who have not attained age 21 and who have less than one year of service are tested separately from the group of those who have attained at least age 21 and/or completed at least one year of service. For non-owners who are HCEs, remember that the determination of whether an employee has exceeded the HCE compensation threshold is determined on a look-back basis. Therefore, there will be very few HCEs of this type who have less than one year of service with the employer.