Testing "Under 21/1 employees" separately in a 401(k) Plan

[LCARUSI]

401(k) Plan provides for immediate eligibility and entry into the Plan. Sponsor wants to test "under 21/1 participants" separately in 401(k)/(m) test.

Assuming plan year is calendar, I'll use 1999 plan year for an example. Who is tested separately in the 1999 test?

Is it employees who are hired after 1/1/99 and would not have a year of service as of 12/31/99?

Or is it employees who are hired after 7/2/98 and would not enter the plan if the plan stretched out entry as far as allowable under the code - to the 1/1/ or 7/1 following one year of service?

[Guest]

there are actually two school of thought on this:

1. test separately all employees who have less than one year of service AND do not meet plan's entry dates

2.test separately those who do have less than one year of service AND have not met earlier of first day of plan year or 6 months after date of hire.

both stances have valid arguments, though I hold for the second.

new regs for purposes of the ADP test also say when testing separately you can look at NHCEs only.

[LCARUSI]

Tom -

What do you mean by this:

new regs for purposes of the ADP test also say when testing separately you can look at NHCEs only

[MWeddell]

Assuming you're using the disaggregation method found in the regulations, not the relatively new statutory method, then either of the two choices you listed are allowed. When determining who falls short of age 21 & 1 year of service, you may either assume that there is an entry date or not.

[Guest]

when performing the ADP test, you are allowed to exclude all NHCEs who 'could have been excluded' if plan used 1 year wait.

e.g. plan has immediate eligibility.

for the plan year 1/1/1999 - 12/31/1999 ee is hired 1/5/99 and is a 10% ownwer.

for purposes of the ADP test, if I choose to test separately those employees who worked less than 1 year, I am allowed to treat the HCE as having worked 1 year. therefore, I have no HCEs in my group of ees with less than 1 year, so I don't need to test this group.

that was part of pension simplification - to make our life easier, and in this case it did. (You are still allowed to include the HCE in the group with those who worked less than a year, but than you have to test - generally its not worth it.)