Coverage testing, terminated participant with zero hours but has post severance comp

PS Plan has no allocation requirements for contribution. Participant terminates in December of 2020, has eligible post-severance comp the next year (2021) so receives 2021 allocation, but has zero hours.

Would you include in coverage testing for 2021, or toss out? I'd include - I don't see how this meets the 410(b) requirements for the term w/<500 hour exclusion. A bit of discussion going on with this question.

Thanks for any opinions.

In.  Especially if you said he's actually receiving a 2021 allocation. Which he should, as that's still "415 compensation" for 2021 under your plan's definition.

Definitely not excludable, since there are no allocation requirements to receive a contribution.

Out of the test entirely:  1.410(b)-2(a) says that a plan satisfies section 410(b) for a plan year... "...with respect to employees for the plan year..."  1.410(b)-9 defines employee as, "an individual who performs services for the employer..."  The last service day was in 2020, therefore not an employee in 2021 and not to be tested.

Ugh, I missed that - not sure how. Thanks!

I'd still be inclined to include. And I question the zero hours. If the person was being paid for accrued vacation that was not taken, are not those hours required to be credited? What about someone on paid leave who doesn't return and ultimately terminated while never providing services during the year but had compensation and hours credited? I'm not  looking to go to the mat on this, just raising some questions.

Would he be excluded from coverage if he terminated in January 2021 with an allocation and less than 500 hours?

7 hours ago, Gilmore said:

Would he be excluded from coverage if he terminated in January 2021 with an allocation and less than 500 hours?

No, in Belgarath's fact pattern there's no allocation conditions, so there's no trigger for the term w/ <500 hours exclusion criteria.  And if they're benefitting, there's no mathematical reason to want to exclude them.

10 hours ago, CuseFan said:

I'd still be inclined to include. And I question the zero hours. If the person was being paid for accrued vacation that was not taken, are not those hours required to be credited? What about someone on paid leave who doesn't return and ultimately terminated while never providing services during the year but had compensation and hours credited? I'm not  looking to go to the mat on this, just raising some questions.

The distinction is in the definition as "performs services for the employer".  Accrued vacation, paid leave, or any similar category of passively counted "hours" are NOT performance of service; they are in fact exactly the opposite.

On 3/22/2022 at 10:16 PM, Nate S said:

No, in Belgarath's fact pattern there's no allocation conditions, so there's no trigger for the term w/ <500 hours exclusion criteria.  And if they're benefitting, there's no mathematical reason to want to exclude them.

Nate, can you clarify which side of this you are on?

I would think you need to look at the plan's definition of hours here.

For example:  If this is just pay for work in 2020 that didn't get paid until 2021?   It seems most plans would say this the hours that go with that pay are 2021 hours. 

Likewise if this is vacation pay that is paid to this person in 2021 my guess is there are hours that ought to be attached to the compensation.

If there are comp and hours in 2021 I find it hard to say this person didn't render service in 2021 for these purposes.   I can't cite anything to go there but that is my thinking.

I guess deep down what I would really do is figure out which way to do the coverage test that this person hurts the test the most and if it still passes document that fact and move on.  I would only spend any time on this if this one person is the difference between passing and failing.  At which time I might ask the client if they are willing to get the plan's attorney to opine on this topic.   That is sort of the practical answer.

I get some times working it out now helps when it matters more in the future.  In the end this is just grey enough you could most likely make a good case either way. 

6 hours ago, Mike Preston said:

Nate, can you clarify which side of this you are on?

Yep, keep them out of the test entirely.  Last day of service is definitive in my mind. 

[Soapbox]However, IMO, the whole question of post-severance compensation has been twisted from it original purpose, which was to define which items paid after severance could be considered compensation; BUT they were to be considered in the year of separation if they meet the timing requirements!!  It's only due to modern payroll systems and cash-basis record keeping that has led to this bleed-over into the next plan year, and possible improper exclusion from a benefit you normally qualify for.   Otherwise, on your last day, you walked with a check for all those items because the employer doesn't want you to return for security/liability reasons.  In Belgarath's OP, he's intimating that if there were allocation conditions, then the ppt would not have received an allocation on that comp just because it was paid at a time when the participant could not have had qualifying service.  This then takes the benefit decision out of the terms of the document and makes it a discretionary decision of the employer's.  Or, you have a flat-out operational failure if one terminee benefitted on that comp because he was terminated on say 11/30, and was fully paid by 12/15; but another employee termed on 12/30, was fully paid by 1/15, but didn't benefit on that 1/15 payout because of an hours condition.

I think ESOP is on the right track.  If the compensation is determined to be post severance compensation that must be considered as plan compensation then the participant should be taken into consideration for 2021 testing, counts, etc.  

What if this were a 401(k) plan and the participant had a deferral election.  Wouldn't the compensation be subject to the deferral election (unless the document specifically excluded ALL post severance compensation)?  In that case wouldn't you need to include the compensation and deferrals in the 2021 ADP test?

@Gilmore ADP/ACP have different inclusion/exclusion criteria than 410(b), OP was originally considering coverage testing only.  But yes, according to the definition of compensation, you could have to test the deferrals and compensation in '21.