Is this nondiscriminatory?

Client has a plan that excludes the following from eligibility:

highly compensated non-key employees, key employees making less than $100K and non-shareholders making more than $28,000.

Everyone else is eligible and gets a 4% match.

Is this discriminatory on its face?  seems like anyone in the middle wouldn't get the match

It all depends on the demographics.  That is why we test for coverage.

Any time I see this type of convoluted eligibility provisions, I suspect it is a form of cherry-picking individuals the client wishes to benefit and excluding "undeserving" individuals the client wishes to exclude.  This type of provision inevitably fails spectacularly when the demographics change, particularly when a change occurs mid-year and an "undeserving" individual becomes eligible for a benefit.

It looks like the goal is to cover "direct" owners while excluding other HCEs including spouses and/or children, and only covering the lowest paid NHCEs while excluding higher-paid NHCEs. I think you would have to satisfy coverage via ratio percentage, that this would not be a reasonable classification for average benefits testing. A bigger hurdle may be the IRS anti-abuse rule on including short service NHCEs while excluding other NHCEs. It's facts and circumstances and does not matter if you satisfy coverage and nondiscrimination, I don't believe. I would not recommend such a design unless the facts and circumstances support all facets (primarily the lower paid NHCEs NOT being short service employees compared to the NHCE population). 

So even if I pass the ratio percentage test, if i'm only passing because I count the short service lower paid NHCEs and short service let's say have less than 1 yr of service, then this is problematic.  But if the less than 20K guys are long term, then I'm ok? 

So I'm eligible as long as I haven't been paid more than 28,000 so far during the year?  But then I'm deemed ineligible and all my benefits are suddenly cut back to zero?

25 minutes ago, Bri said:

So I'm eligible as long as I haven't been paid more than 28,000 so far during the year?  But then I'm deemed ineligible and all my benefits are suddenly cut back to zero?

 

If we ignore the other parade of red flags, I would assume this would have to be prospective.  Still seems like a ticking time bomb though.

On 8/15/2025 at 4:41 PM, RatherBeGolfing said:

I would assume this would have to be prospective

On a lookback year basis or maybe if scheduled salary or full time hourly rate is less than, but any way this does not pass the smell test.

Also, are they looking to have this as a SHM 4%? So only covering NHCEs who are least likely to contribute? How else would they expect to pass ADP and ACP? 

IMHO, in addition to the inevitable failure of the coverage test, this is no way for the owners to be running a business. It is basically saying, if we like you, you're in, if we don't like you, you're out and if we don't like you, we can keep you out by paying a few thousand bucks more to keep you out. It is bound to cause resentment, mistrust and ill-feeling for the employer and among the employees. Moreover, to discourage this chicanery, you should be charging a nuisance fee for putting up with the inconvenience of constructing all kinds of crazy hoops to try to squeak their inanely complex structure squeak through compliance testing.

If coverage passes and the nondiscrimination test passes for the year, then you’re almost there. Take a look at the Carol Gold Memo and see if the benefiting group of NHCEs are primarily short service, low paid, and receiving nominal benefits. There’s no bright line for that.

So after reviewing that, does the employer think the plan satisfies treasury regulation 1.401(a)(4)-1(c)(2)? It’s their call.