Excluding Interns as a Class from 401(k) Plan Participation

A client currently has age 21 and immediate eligibility. They are not safe harbor plan. They want to change their eligibility so that interns that are hired for the summer months are not included. However, they do not want to change to 1 year and 1000 hours of service. Can they just exclude these interns and other part-times?

Any suggestions?

Yes, you can if the plan document allows for it. Note, if the intern/seasonal/temp employees meet 1 year and 1000 hours, they must enter.

You can exclude interns as a class.  They might not be excludeable from the coverage test if they work enough hours and are over 21.

For vesting those all years count if they have a year of service. 

As rule you can't exclude part-time employees as a class.  I believe that is seen as a backdoor service requirement that violates the rules.  Now if the part-time employees are all in one class (they are all maintenance workers for example) you can exclude the class but you might have to factor them in coverage testing.

Agree with ESOP Guy - you can exclude as a class because "interns" are clearly a reasonable classification of employees for business reasons, but as noted, any that meet eligibility requirements that could have been imposed (i.e., 21 & 1) cannot be excluded from coverage and nondiscrimination testing (but are still excluded from plan, unlike part-timers who would have to be covered).

I wouldn't endorse exclusion of interns by class without a bit more analysis. The issue is whether such an exclusion is deemed a violation of 410(a).  I can see a circumstance where that might be the case.  If so, it matters not that the resulting coverage test satisfies 410(b).

So, the question becomes what, if anything, could be deemed a violation of 410(a)?  We know one..... part timers.  But there can be others.  Here's one example: say a medical company has a class of employee known as "pediatric nurse" and an intern program where 100% of their new hire pediatric nurses come from those who have gone through the intern program.  In my mind, this is a clear violation of 410(a) if interns are excluded by class if any of them would have entered the plan without the class exclusion.

This seems like a no-brainer to me with no need to take a 410(a) risk: amend the plan so that people classified as interns enter on a bi-annual entry date after completing a year of service.  Am I missing something? 

Assuming the OP means what we all think of as "interns" (half of us probably had internships for crying out loud) and not a rouse to impose an undue wait time, then I say keep it simple and exclude interns as a class.

It is my impression that IRS agents are taught to shoot first and ask questions later when there is an exclusion of a class that gives off any scent of a service-based exclusion.  I don't see why my suggestion isn't a perfect answer given that no intern is likely to complete a year of service. 

My former employer (an accounting firm) had interns all the time. Our plan excluded interns as a class, but obviously brought them in if they worked a year. It was rare for that to happen, but we did have the occasional intern that would work multiple tax or audit seasons and then have to enter the plan.

It was looked at a couple of times by the IRS over the 12+ years I was there (and responsible for it's operation) and the intern exclusion was never an issue. YMMV.

According to Treas. Regs. 1.410(b)-4(c)(2) as long as the plan satisfies the “Ratio Percentage Test” — meaning that the percentage of the non-highly compensated employees benefiting under the plan equal at least 70 percent of the percentage of the employer's highly compensated employees benefiting under the plan any category of employees may be excluded.

If you can't pass this test I would be cautious.  In that case employment categories should not indicate length of service, such as "seasonal employees" but rather a job description that serves a bone fide business purpose such as "employees at the New Brunswick plant" or "life guards".

I think the discussion in this post centers around 410(a), not (b), and I for one don't know what you are talking about in your second paragraph.