Excluding a Class/Division of Employees from Participation

Hello all. Any experience or insight as to excluding a classification of employees from a traditional 401(k) plan would be helpful: 

ISSUE: Employer (traditional 401(k) Plan Sponsor) wishes to exclude a division of employees working on a new contract in order reduce costs and win contract. This would include mostly new employees hired to perform under this contract as well as a handful of current employees who already participate in the plan. The [Note: not a full time vs. part time classification issue and this is also not a new line of business for the Employer.] 

[Option 1]: I believe the Employer can exclude the NEW HIRES from participating in the plan (so long as Plan meets minimum coverage requirements). However, could the Employer exclude the CURRENT employees (already in the plan) from accruing additional hours of service for their work in this division, or would this constitute a cutback in benefits?

[Option 2]: Alternatively, could the Employer exclude all employees in this division (new hires and existing employees) by requiring 3 years of service in order to be eligible (currently plan doc requires 1 month)? 

[Option 3]: Alternatively, could the Employer include both new and existing employees in this division in the Plan but with less of a match? (Concern is that decreasing the match for existing employees in the plan could be a cutback in benefits)

Your thoughts are most appreciated. Thank you!

Provided the separate group and the non-separate group satisfy 410(b) [1] is OK.  Yes, it is a cutback, but as long as prospective, it is ok. [2] = no can do. Subject to same caveat as [1], [3] is ok, too.  Also assumes not a governmental plan sponsor.

25 minutes ago, IhrtERISA said:

[Option 1]: I believe the Employer can exclude the NEW HIRES from participating in the plan (so long as Plan meets minimum coverage requirements). However, could the Employer exclude the CURRENT employees (already in the plan) from accruing additional hours of service for their work in this division, or would this constitute a cutback in benefits?

No 411(d)(6) cutback issue with excluding FUTURE participation for a current participant.  Any benefit the participant has already accrued is protected, but you can eliminate continued participation.

We had a good discussion in this earlier this year in this thread

19 hours ago, Mike Preston said:

Provided the separate group and the non-separate group satisfy 410(b) [1] is OK.  Yes, it is a cutback, but as long as prospective, it is ok. [2] = no can do. Subject to same caveat as [1], [3] is ok, too.  Also assumes not a governmental plan sponsor.

19 hours ago, RatherBeGolfing said:

No 411(d)(6) cutback issue with excluding FUTURE participation for a current participant.  Any benefit the participant has already accrued is protected, but you can eliminate continued participation.

We had a good discussion in this earlier this year in this thread

Thank you very much RatherBeGolfing and Mike Preston, this is most helpful. One follow up question - In addition to satisfying the Minimum Coverage Requirements under 410(b), would Nondiscrimination Testing also be required for Option 3 (where the employer match varies), or would Nondiscrimination Testing be required for both options? Thanks

What are "both" options? In general, other than defining a group that satisfies 410(b), if the contribution source being considered is a non-safe harbor match then the ACP test is used to satisfy non-discrimination.

just to be clear

you don't have just 1 coverage and 1 nondiscrim test for the whole set up

if you have a 401k plan you have 3 coverage / nondiscrim reports

1. 401k  coverage ((anyone who could have met eligibility) and ADP for nondiscrim (ADP only includes those elig to defer)

2. 401m for coverage and ACP for nondiscrim - only include those who get a match for ACP

3. 401a(4) [profit sharing/forf] for coverage and nondiscrim ends up with all bodies

if you use the otherwise excludable option then you could end up with 6 'tests'

You can amend the plan to exclude these employees beginning with any date. No deferrals, no match from that date on. (I'm assuming this is not a safe harbor plan.) If the plan has a catch-up match or profit sharing, would need to see exactly how articulated in the document to know when/how to apply the termination to that, but generally should be able to cut off immediately.

The employees' post-amendment service is still counted for vesting, if you have employer contributions subject to vesting, and of course these employees' service (e.g., for new hires in the division) continues to count for eligibility, e.g. if you amend the plan again to readmit the division or if an employee changes division. Because the employees still get vesting service, you don't have a partial termination.

Of course, going forward you have the burden of passing eligibility without these folks. If they have a higher concentration of non-highs than the other division, this could be a problem.