Coverage

A school with 300 FTEs hires 90 summer counsellors each year. The Plan for the 300 FTEs does not require a waiting period, or minimum hours, or last day of the year employment. Fully vested contributions are made with each payroll period. 

Counsellors are excluded as a job class. They work no more than 400 hours a year and are terminated at the end of each season. 

Am I correct the counsellors are excludible employees simply because they are terminated in the year with less than 500 hours?

I don't believe it matters that the Plan for the FTEs does not require hours or last day of the year employment. 

Thoughts?

The rule that allows the terminated employee with under 500 hours to be not counted for the test can only be applied if the reason they do not benefit is that they fail to meet an allocation condition imposed by the terms of the plan, such as a last day or minimum hours requirement. Perhaps the Otherwise Excludable Employee rule can help you instead? Is this a 403(b) plan?

John, This 403(b) Plan allows all employees, including Counsellors, to defer. For employer contributions, there is a "fail-safe provision" for the summer counsellors, which they will never satisfy. (They would get an allocation if employed at the end of any year in which credited with at least 1,000 hours.) The "fail-safe" is not needed for the 300 other employees, who receive contributions each payroll period regardless of hours or last day of the year employment. As I read the terminated employee rule the fact that the included class gets an allocation regardless of hours is irrelevant. It seems that for coverage a plan can ignore any terminated employee with less than 500 hours.  

I don't believe the otherwise excludible employee rule would work (minimum age and waiting period, but not yearly allocation requirement). I believe you can use the excludible employee rule only for the least rigorous age and waiting period conditions in a Plan, so because the included 300 (which includes 20 HCEs) come in immediately, we are out of luck with that theory. (Adding a minimum age or one year waiting period would not be acceptable to this school.) 

For this plan, with no age or waiting period for included class (all except counsellors) I just can't think of any theory except terminated employee that excludes the part-time counsellors, whose numbers make it impossible to pass salary-ratio. 

Under 1.410(b)-6(f)(1), there are five conditions that must be met in order to treat an employee as excludable:

i. The employee does not benefit for the plan year,

ii. The employee is eligible to participate in the plan,

iii. The plan has an hours of service or last day requirement in order to accrue a benefit, 

iv. The employee fails to accrue a benefit solely because of the failure to meet the hours of service or last day requirement, and

v. The employee terminates employment during the plan year with no more than 500 hours of service.

"Plan" for 410(b) purposes means after the application of the mandatory disaggregation rules, so not the entire plan, but just the matching or profit sharing portion of the plan. See 1.410(b)-7(c).

Leaving condition (iv) aside, the counselors in your example satisfy condition (i) and (v) but not condition (ii), and condition (iii) is also not satisfied. Therefore the counselors cannot be treated as excludable for purposes of the coverage test.

However, the plan will likely satisfy the coverage test by disaggregating the portion of the plan covering otherwise excludable employees, that is, the employees who have not satisfied the maximum age and service conditions under 410(a)(1). That will include the counselors and presumably some of the FTEs, however as long as that group does not contain any HCEs it will automatically satisfy the coverage test.

For that matter, you haven't said anything regarding the relative number of HCEs and NHCEs in the employee population. You said it is a school, so presumably there are not a lot of HCEs. Would the plan pass the ratio percentage test, even without disaggregation? How about the average benefits test?

CB,

Very good comments. Here is how I would address the concerns you raise, and this would apply to each of the disaggregated "plans" - match and non-elective.

Condition ii. The counsellors are immediately eligible, just like everyone else. Unlike the rest of the population, they need to perform 1,000 hours and be employed on December 31 to accrue a benefit. In the unlikely event a counsellor actually satisfied those conditions, a fully vested contribution wouold be contributed after the year ended. 

Condition iii. The counselors do have an hours of service and last day requirement. The other employees (mostly NHCEs) do not. I don't think that prevents application of the terminated employee rule.

Observation: I don't think disaggregation would work based on minimum age and initial eligibility, because most of the employees do not have to satisfy initial eligibility requirements. However, the terminated employee rule does not seem to require that hours of service and last day apply to the entire plan, just the employees in the group being tested. 

Going forward, a minimum age of 21 would solve the problem. I'm trying to analyze  past years in the event of audit. The best solution I see would be the terminated employee rule so that the counsellors could be excludible. 

I'd love to hear more from you if you have the time. 

15 hours ago, gc@chimentowebb.com said:

Condition ii. The counsellors are immediately eligible, just like everyone else. Unlike the rest of the population, they need to perform 1,000 hours and be employed on December 31 to accrue a benefit. In the unlikely event a counsellor actually satisfied those conditions, a fully vested contribution wouold be contributed after the year ended. 

This is different from what you said in your original post, which was that counselors are excluded from participation as a class. If they are eligible, but simply never meet the annual allocation conditions, that changes the situation quite a bit. Going back to condition (iv) I think the word "solely" may still foul things up for you however.

15 hours ago, gc@chimentowebb.com said:

Observation: I don't think disaggregation would work based on minimum age and initial eligibility, because most of the employees do not have to satisfy initial eligibility requirements. However, the terminated employee rule does not seem to require that hours of service and last day apply to the entire plan, just the employees in the group being tested. 

I think you might be misunderstanding how the otherwise excludable testing option works. You take ALL employees who have not met the minimum age and service requirements of 410(a) (1 year of service/1000 hours and age 21), and treat them as if they were a separate plan. The disaggregation group would have to satisfy testing on its own. As long as nobody in that group is an HCE (which is unlikely, as HCE status is based on prior year's compensation, and an employee who worked enough in the prior year to earn above the compensation limit has probably met the 1000 hour requirement and would not be otherwise excludable), then the disaggregation group automatically passes coverage testing. See 1.410(b)-2(b)(6).

The remaining non-disaggregated population would then be only those employees who have met 1 year and 1,000 hours of service and age 21. If none of those employees are excluded under the plan then the coverage test passes.

CBZ, I like your answer. Thanks.

This Plan is unusual in that there is immediate eligibility for all, but only an allocation requirement for this counsellor group. 

I  like the interpretation that we can break them into the two groups for testing even though the 1 year/age 21 requirements are not in the Plan at all.