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401(a) Failure Due to 457(b) Plan's Employee Exclusions?


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A governmental 401(a) plan excludes part-time, temporary and seasonal employees, subject to a 12-month, 1000 hour fail-safe, which makes the exclusion inapplicable if satisfied.  The only plan benefit is an employer contribution equal to 5% of plan compensation to the account of any participant who defers at least 3.5% of compensation under the employer's 457(b) plan.  The 457(b) plan excludes part-time, temporary and seasonal employees but does not grant an exception for employees who complete 12 months of service and 1000 hours.

The exclusion under the 457(b) plan, therefore, has the effect of depriving part-time, temporary and seasonal employees who meet the 401(a) plan's fail-safe from receiving any benefit under the 401(a) plan, as these employees are not able to defer under the 457(b) plan.

This circumstance appears to me to present a tax qualification issue for the 401(a) plan.  Any thoughts? 

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Peter Gulia,

The document I'm working from is under the heading, "Adoption Agreement for Great-West Trust Company, LLC Non-Standardized Governmental 401(a) Pre-Approved Plan," and includes the following language applicable to any exclusion of part-time, temporary or seasonal employees: "If option 4. - 6. (part-time, temporary and/or seasonal exclusions) is selected, when any such excluded Employee actually completes 1 Year of Service, then such Employee will no longer be part of this excluded class. For this purpose, the Hours of Service method will be used for the 1 Year of Service override . . ."

So, it appears the document drafters, anyhow, assumed that a governmental 401(a) plan is subject to the requirement that part-time, temporary and seasonal employees not be excluded from the plan upon meeting the fail-safe. 

Do you think otherwise?  I don't believe there is a problem with the 457(b) plan not providing a similar fail-safe, per se, except that it does have the effect of negating the operation of the fail-safe under the 401(a) plan, since contributions under the 401(a) plan depend entirely on an employee's participation in the 457(b) plan.  

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About the situation you describe, I don’t assume anything.

Even more so about a plan stated, in whole or in part, using an IRS-preapproved document.

Is the § 457(b) plan stated using a form of document Empower furnished?

Does the plan intended as a § 401(a) plan state expressly that the matching contribution is conditioned on a deferral under the employer’s § 457(b) plan?

If so, is that expression within the base document or adoption-agreement form the IRS issued the opinion letter on?

To help the plan sponsor’s lawyer or other practitioner evaluate the provisions’ effect, consider asking Empower to explain why the documents are stated as they are. But recognize that Empower does not give tax or other legal advice, so a practitioner must independently take responsibility.

I see your doubt about whether a provision of the employer’s § 457(b) plan so negates a provision of the § 401(a) plan as to call into question whether a user may rely on the IRS’s opinion letter, or whether the § 401(a) plan truly is administered according to that written plan.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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