LTPT deferrals included in average benefits testing?

[Tom]

A plan sponsor wants to cover his LTPT spouse and children so they can make deferrals.    I realize they will not receive any employer contribution. This plan is cross-tested and provides the minimum gateway for other NHCEs (3% SH and 1.4% PS) The family members' deferral rates will be a very high % of pay.  I want to make sure their deferrals don't get included in the big average benefits test EBARs Otherwise they will cause that part of the test to fail and then cross-testing will become very challenging.

Thank you,

Tom

[CuseFan]

What do you mean "wants to cover"? Make them employees?

If they are already employees he either has to cover them under the LTPT rules if they qualify or he can provide coverage for them on a different basis in which case they are otherwise excludable employees. 

Either way, I believe they are excluded from average benefits test. However, I think you need to careful how they get added because as otherwise excludable they are HCEs and you would have separate coverage and nondiscrimination testing.

From a prior ASPPA presentation, link to which is provided below:

An LTPTE is an employee who: 

• completes two consecutive years with 500 hours of service (HOS), and for plan years beginning before 2025, three consecutive years of 500 HOS; 
• attains age 21 by the second (or third, if applicable) year of 500 HOS;
• is not a union employee/nonresident alien (union HOS count); and
• does not otherwise satisfy normal requirements. An employee who satisfies normal requirements before (or at same time) as LTPT conditions is never an LTPTE. An employee who satisfies normal requirements after becoming LTPTE ceases to be LTPTE and becomes a former LTPTE (FLTPTE).

If the employee becomes eligible for any other reason, he or she is not an LTPTE. If the plan has eligibility requirements that are more lenient than those of the LTPT rules (e.g., in which HOS are not an issue or where the otherwise LTPT will enter faster than required under the law), the employees are never LTPTs. The effect of not being an LTPTE is that the LTPT vesting rules will not apply.

https://www.asppa-net.org/news/2024/5/close-look-ltpt-rules-asppa-spring-national/

[Tom]

The spouse and adult children if they have 500+ hours in 2024 and 2025 (but <1,000) and are age 21, they are LTPT for 2026. The doctor owner wants them to be able to fund maximum elective deferrals as LTPT employees.  He knows they will not receive any employer contribution. 

I just want to make sure these LTPT family members do not come into play for testing whatsoever with this cross-tested plan which only has to provide the minimum gateway for eligible NHCEs at 3.4% to max the doctor.

Thank you

[Artie M]

 

You should really read or re-read the proposed regs. Federal Register :: Long-Term, Part-Time Employee Rules for Cash or Deferred Arrangements Under Section 401(k) 

They generally permit an employer to elect to exclude LTPT employees from the application of the nondiscrimination requirements of section 401(a)(4), the ADP test, the ADP safe harbor provisions of section 401(k)(12) and (13), the ACP test, the ACP safe harbor provisions of section 401(m)(11) and (12), and the 410(b) minimum coverage requirements. So, generally they can be excluded when determining whether a plan satisfies those nondiscrimination and minimum coverage requirements.  They basically say that if you exclude LTPTs from nondiscrimination, they must be excluded from all nondiscrimination testing.

In fact, the plan could exclude them from testing and still give them additional benefits (e.g., matches).

Note that if your plan is not intended to satisfy the ADP or ACP safe harbors, the proposed regulation would not require an election to be set forth in the plan. However, the regs state that the plan would need to provide “enabling language.”  It say in this case if the plan document doesn’t include enabling language, or an election under the proposed reg, then LTPT employees would not be excluded for purposes of determining whether the plan satisfies 401(a)(4), the ADP test, the ACP test, or the 410(b) minimum coverage requirements (to the extent those provisions would otherwise apply to the plan).

If the plan is a safe harbor plan, it must specify in the document whether the safe harbor provisions will apply to the LTPTs.

Apparently, this exclusion from testing seems like it would allow the owner the ability to get "creative" since these potential HCEs, i.e., the spouse and children of HCE, can escape testing.