Amend DC Plan to Restrict Eligible Participants

[Caroline]

A customer has had a defined contribution plan for a while, participation is open to all employees if they work the threshold 1000 hours. Now, the customer wants to cut back on who can participate based on their job types. The customer understands it can't change the rules for present employees. But for John Doe who is hired next year in a job classification that will be cut, I'm not sure how the plan can be revised to maintain the present participants and prospectively cut job classes. I've drafted a web of the 1,000 Hour Rule and its implications if not followed; I've looked at non-discrimination rules; I've looked at the general plan amendment rules. 

I'm stumped. What other rules should I read to figure out this goal? So far it looks like the plan cannot be amended to prohibit future participants based on their job classification, but I have to imagine there is some mechanism that allows it. 

[EBECatty]

Someone can correct me if I'm misremembering, but isn't the 1,000-hour "once-in-always-in" rule a function of Code Section 410(a) such that the employee cannot become ineligible solely based on working under 1,000 hours in a subsequent year?

I don't think this would restrict you from saying, moving forward, everyone in a particular job category is excluded from plan participation, regardless of how much they have worked, past or present. In other words, you wouldn't be removing them from eligibility because they worked under/over 1,000 hours; you would be removing them from eligibility because of their job category.

[Caroline]

Thank you for your reply!

I think you're right, and that's what I told the customer. If John Doe was hired in 2015 as a cashier and has followed the 1000 hour rule and other eligibility requirements, he can't be cut from participation (once in always in). The customer is asking me to figure out how to amend the plan to prevent specific jobs, "cashiers," from participating. So Tyler Doe who is hired in 2026 as a cashier cannot participate in the plan while John Doe is ok/grandfathered.

I'm trying to find the rule or guidance on how to amend the plan for future employees and my goodness is it a stumper. 

[Lou S.]

Eligibility is not a protected benefit. So if they wanted to amend the Plan to exclude all cashiers going forward past/present/future you can do that. It doesn't change the distribution rules for for the employee. They are still subject to the plan terms, they continue to accrue vesting service, they just don't get future contributions.

Two caveats, 1st you can't cut back a benefit they have already earned a right to, so if you are trying to exclude a current cashier who has already satisfied the allocation condition for 2025, you couldn't make it effective for them until 2026.

2nd those folks still go into your nondiscrimination tests, they are just no considered "not benefiting" so if you exclude too many NHCEs you can run into testing problems.

[Caroline]

1 minute ago, Lou S. said:

Eligibility is not a protected benefit. So if they wanted to amend the Plan to exclude all cashiers going forward past/present/future you can do that. It doesn't change the distribution rules for for the employee. They are still subject to the plan terms, they continue to accrue vesting service, they just don't get future contributions.

Two caveats, 1st you can't cut back a benefit they have already earned a right to, so if you are trying to exclude a current cashier who has already satisfied the allocation condition for 2025, you couldn't make it effective for them until 2026.

2nd those folks still go into your nondiscrimination tests, they are just no considered "not benefiting" so if you exclude too many NHCEs you can run into testing problems.

Thanks Lou! While I go attempt locate the rules permitting a change in eligibility, do you know the rule or regulation which gets to your conclusion? This is a path my customer is interested. 

I've explored the 1,000 Hr., Nondiscrimination, Anti-Cutback, and Safeharbor rules for this answer.  

[EBECatty]

I think you can still exclude John Doe moving forward because you're not excluding him based on his service (instead his job category). 

Even if you want to keep him in, and exclude only future cashiers, generally we'd write the exclusion as something like "All cashiers hired on or after xx/xx/xxxx." 

[Lou S.]

Yeah the key is job classification. And I agree you could do it to all cashiers or you could grandfather the old ones in and have it apply only to new ones.

[Lou S.]

Try this old thread. 

 

 

[Caroline]

16 hours ago, Lou S. said:

Try this old thread. 

 

 

Glorious. Thank you!

[Kirk Vaughn]

Some pre-approved plan documents allow waiver of service requirements for all employees hired before a certain date.

[Paul I]

When drafting plan provisions related to changes to exclusion by classification, be sure to address what happens in situations such as:

• a participant is hired into a covered classification and then at a future point in time the participant starts working in an excluded classification.
• a participant is hired into an excluded classification and then at a future point in time the participant starts working in a covered classification.
• if a participant worked in a classification that was covered, and the plan grandfathers participants who worked in that classification before the effective date of the new provisions excluding that classification, and the participant terminated employment prior to the effective date of the new provisions, and the participant is rehired after the effective of the new provisions, will this participant be grandfathered or excluded.
• consider the impact of the change should these situations occur during the time period between when the an employee meets the eligibility requirements for a type of contribution and an employee's entry date which may be months later.
• if the plan uses rules of parity for eligibility, consider how these rules can complicate these situations particularly if the plan requires a one year wait to re-enter the plan.

When considering situations like this, be sure to consider how the plan will apply to each of the three types of contribution sources: elective deferrals, match, and nonelective employer contributions, particularly when applying any allocation conditions for the match and NEC. 

The most important consideration that @Lou S. pointed out above is that the plan will need to consider employees in the coverage testing for each of the three contribution sources who met the plan's eligibility requirements but are excluded by classification. 

[CuseFan]

Think about union exclusions - employees who go back and forth between union and non-union status become eligible/ineligible employees and into/out of active participation all the time. The difference here as noted above, is that you cannot statutorily exclude from coverage and non-discrimination testing if they have completed age and service eligibility requirements.