Excludable or Benefiting

[CuseFan]

A DBP requires 1000 hours for a year of credited service. However, final average earnings (FAE) is determined monthly through end of employment. Therefore, someone who terminated and worked less than 501 hours in a year could nonetheless experience an increase in their accrued benefit by virtue of an increase in FAE despite not earning credited service.

Are we able to statutorily exclude these participants for 410(b) testing or are they considered benefiting or could benefit (i.e., term < 501 hours NOT being the reason they fail to benefit)? I know we would have to include or exclude all such participants on whichever basis whether they experienced a benefit increase in actuality or not.

I did a little digging but couldn't find anything right away so am turning to very small colleagues in the forum. Thank you in advance.

[Paul I]

It seems these terminated employees are includable in 410(b) testing if they get an increase in benefits.  The "and" in the 1.410(b)-6(f) below makes (i)-(v) look like a 5-part test.  If they event they do not get an increase attributable to the FAE, then see (v) below where the failure to accrue is not solely because of the failure to satisfy the minimum period of service.  Frankly, I have never focused on this exclusion at this level of detail and it would be great to hear counterpoints.

The EOB says Benefiting employees - these are the employees who get an allocation of employer contributions under a defined contribution plan or who increase their pension benefit under a defined benefit plan. If the plan includes a section 401(k) arrangement, also keep track of all employees who at any during the plan year had the right to elect to defer compensation under the section 401(k) arrangement.

1.410(b)-6(f) tells us:

(f) Certain terminating employees

(1) In general. An employee may be treated as an excludable employee for a plan year with respect to a particular plan if -

     (i) The employee does not benefit under the plan for the plan year,

     (ii) The employee is eligible to participate in the plan,

     (iii) The plan has a minimum period of service requirement or a requirement that an employee be employed on the last day of the plan year (last-day requirement) in order for an employee to accrue a benefit or receive an allocation for the plan year,

     (iv) The employee fails to accrue a benefit or receive an allocation under the plan solely because of the failure to satisfy the minimum period of service or last-day requirement,

     (v) The employee terminates employment during the plan year with no more than 500 hours of service, and the employee is not an employee as of the last day of the plan year (for purposes of this paragraph (f)(1)(v), a plan that uses the elapsed time method of determining years of service may use either 91 consecutive calendar days or 3 consecutive calendar months instead of 500 hours of service, provided it uses the same convention for all employees during a plan year), and

     (vi) If this paragraph (f) is applied with respect to any employee with respect to a plan for a plan year, it is applied with respect to all employees with respect to the plan for the plan year.

[truphao]

I think they are benefiting.  I would not be uncomfortable deploying a de minimus threshold though ($ or %).