Nondiscrim testing - coverage

Simple real example:

Dentist and wife are eligible as are three employees.  It is safe harbor match plan.  One employee terminated with <501 hours.  We are allocating PS only to the doctor and the two ongoing employees to meet 410(b) and in a uniform integrated amount to pass 401(a)(4).  The dentist prefers to cover the terminated employee which he can as a class-allocated plan with no allocation conditions and this employee only had $2,000 in wages.  This would mean full PS to 2 NHCS and top heavy to the 3rd employee who is still working.  The result is significantly less cost.

My real question is with the testing software - I thought those who terminated with <501 hours were excluded from testing.  That would mean only 2 eligible NHCEs in the testing and only one would have to be covered to pass ratio %, but the testing reports say fail if we only cover one.  The employee is coded correctly in the software application with just a few hours and a termination date.

Comments? Thanks

If you have no allocation conditions, then you don't get to exclude the terms under 501 hours.  You can only exclude them if the hours/last day rules are the SOLE reason the participant isn't benefiting.  (That's different from the sponsor just choosing for them to be a zero even if the plan would allow something nonzero.)

Ah ok. Almost all our plans are class allocated with no conditions. So that little detail fell off my radar (probably not the only one.). Thanks