Excluding part-time hourly employees

The client employees few salaried employees and a bunch of hourly-paid employees.  Many hourly employees are scheduled to work 1200 -1400 hours per year.  Is it a "reasonable classification" to define the "hourly employees who are scheduled to work less than 2,080 hours per annum" as an "Ineligible Class"?   I do not need them for testing as my plan would pass the ABPT with very comfortable margin.  What are the issues with my thinking?  Let's assume there won't be any employees who are scheduled to work part-time but later show up with a gazillion of hours.

You could exclude all hourly-paid employees, but you can not have a service-based condition with more than 1,000 hours.

But not statutorily exclude any who work >1000 hours for a computation period.

So if you are wanting to cover hourly employees who are credited with 2080 hours (aka full-time) while excluding employees credited with fewer hours (aka part-time), you would have to find some other legitimate non hours related business classification for which to exclude, assuming you can pass coverage as you say without those >1000<2080 employees.

If all such employees worked in the same location, department, etc. exclusive of hourly employees you want/need to cover, that might work, but I would tread lightly as the exclusion of part-time employees who work more than 1000 hours is a specific NO-NO in the eyes of the IRS.

2 hours ago, CuseFan said:

So if you are wanting to cover hourly employees who are credited with 2080 hours (aka full-time) while excluding employees credited with fewer hours (aka part-time), you would have to find some other legitimate non hours related business classification for which to exclude, assuming you can pass coverage as you say without those >1000<2080 employees.

Not to muddy the water, but let's say there is a legitimate business classification to exclude employees.  Is the jury still out as to whether or not the exclusion applies to the Long Term Part Time rules?  Thanks.

I don't see that "hourly employees who work fewer than 2,080 hours per year" would be considered an objective business criteria for plan exclusion.  While Hourly Employees would be a reasonable job classification due to the nature of compensation, when you tack on an hours provision that is at cross-purposes with 410(b), you have not passed ABPT, even if the math works.  

There are other ways to skin the cat as CuseFan mentions.  Why not carve out a meaningful population of these very individuals by excluding specific job categories - as many as you need to make it work.  Although it may require the employer to provide more comprehensive data with their annual census, it ensures you have appropriately excluded those employees using objective and reasonable business criteria.  

Regarding the LTPT question, in the whirlwind of the many SECURE 2.0 webinars I have attended, the example that stands out for me was a geographic location question - if employees of Division B are excluded from the plan, would LTPT employees who work at Division B also be excluded?  And the answer was yes.  That was a pretty straightforward example of course . . . but perhaps objective and reasonable job classifications will ultimately prevail in the world of LTPT employees too . . . 

Thank you all.  I have reservations for same reasons as pointed out by the BL neighbors.   One thing though has appeared to escape through the discussion.  I am not trying to define the excluded class as "who work less than 2080 hours" but rather as "who are scheduled to work less than 2080 hours".  To me it feels like somewhat objective criteria equivalent to a job class carveout.  Probably does not change the answer though but I wanted to highlight.

Doesn't change - it's a no-no. Take a look at IRS QAB FY-2006-3, and Treasury Regulation 1.410(a)(3)(e).

Based on the circumstances in OP where there are a few salaried employees, a lot of hourly employees that work more than 1000 hours and the desire is to exclude the hourly employees using a classification, this would seem that the plan will struggle to pass coverage.  Once the plan adds the classification for a reason other than one year with 1000 hours, these hourly employees are going to wind up in the denominators in coverage testing.  It seems counter-intuitive that the ABPT would pass by a very comfortable margin.

As far as basing the classification on hours scheduled to work, this definition seems to give the employer too much discretion to pick who is in or out, and there does not seem to be a valid business reason for the classification.

It sounded like most of the population was hourly but also full time (2080 hours) and the desire was to exclude a fair number of part time hourly employees. The "scheduled to..." classification would be even more blatantly abusive as some part timers could reach or exceed that through overtime. When it comes to exclusions, IRS is adamant that any hours-based (or disguised) criteria exceeding 1000 hours is a no-no.

To say what others are saying in a different way.  If you're interested, go back and read the joint committee report (I think that's the best to look at) when ERISA was enacted in 1974.  The hour-of-service rules were intended to replace the strategies of part-time and temporary service exclusions.  You can use job classifications, still, if they're not a subterfuge for evading the hour-of-service rules, and otherwise meet the coverage requirements.  I think the meaning of the term "subterfuge" should be pretty clear to everyone. You can look at it this way.  The benefits of qualification are suppose to accrue only to those employers who don't discriminate against lower paids.  Seems fair enough, though not all would agree.

Again, thank you all.  My thinking in terms of "scheduled" appears to be flawed and I appreciate the feedback tremendously.  Back to collecting the job descriptions route if this is what prospect wants to do....Regarding the details why ABPT passes - this is a combo CB/PS one owner/20 NHCEs situation and there are few younger lower-paid salaried employees who will carry the ABPT.