Excluding HCEs

Hi -- I have a client who has elected to exclude highly-compensated employees in order to avoid potential nondiscrimination or coverage issues due to some idiosyncrasies with their population. Due to one-time variation in bonuses, as well as the upcoming jump in the HCE threshold for 2023, we anticipate a few individuals may drop down into non-highly compensated employee pool. Would an exclusion for "employees previously designated as HCEs" or employees making over a certain dollar amount be permissible? Do you all think the former would violate the "definite written program" rule? Thank you for your thoughts!

"HCEs and Former HCEs" seems a reasonable classification to define excluded employees.

Agreed, any reasonable determination that is defined and not subject to annual employer discretion in its application, would be permissible provided the result then satisfies coverage, which would be an automatic if all HCEs were always excluded. 

"satisfying coverage" would still be an issue because "former HCE" isn't an HCE.

but zero current HCEs would be covered, so no big deal if a handful of now-they're-NHCEs don't benefit.....

What's wrong with letting them participate in the year(s) they are NHCE's? The plan won't fail the ADP test if they contribute when they are NHCE's.

14 hours ago, EMoney said:

What's wrong with letting them participate in the year(s) they are NHCE's? The plan won't fail the ADP test if they contribute when they are NHCE's.

They want to avoid employees jumping in and out of the 401(k) plan. The HCEs are allowed to participate in the NQDC, so they prefer some stability there.

59 minutes ago, EmpbAF said:

They want to avoid employees jumping in and out of the 401(k) plan. The HCEs are allowed to participate in the NQDC, so they prefer some stability there.

I received a DL not long ago on an individually designed 401(k) plan with the same provision. The 401(k) excludes every employee who is, or who has ever been, an HCE. 

The nonqualified plan covers everyone who is, or who has ever been, an HCE. Basically, once you become an HCE in one year, you are forever excluded from the 401(k) plan and covered by the nonqualified plan. While that could cause an issue with the requirement to cover only a top-hat group for some employers, here the demographics were such that it wouldn't be a problem. 

Thank you to everyone who commented. I really appreciate it.