501 hour exclusion

If we have everyone in their own group, and no allocation conditions, for testing purposes, can we exclude those with less than 501 hours and term'd?  I don't think so/just checking.

I believe the exclusion is if they don't benefit by reason of termination of employment and worked less than 501 hours. Your situation appears that they don't benefit because the employer chose not to provide them with a contribution, and so I would concur with you.

Sure, you may exclude them, depending on how the plan document provision is worded.  Why not?  You might be indirectly imposing allocation conditions, but the nature of having each participant in his/her own allocation group gives the employer discretion in that regard.

However, I don't usually work with this plan design, so collect more opinions from other posters.

15 hours ago, MWeddell said:

Sure, you may exclude them, depending on how the plan document provision is worded.  Why not?  You might be indirectly imposing allocation conditions, but the nature of having each participant in his/her own allocation group gives the employer discretion in that regard.

I phrased the question awkwardly - I know they can be excluded and not get a contribution, but can they be excluded from testing (i.e. ignored/treated as if they don't exist)?  Say we have an owner and 1 NHCE; the NHCE leaves.  No 401(k), no SH, just PS.   In a standardized plan, the plan language would exclude the NHCE.  In a non-standardized plan with groups, and no allocation conditions, I don't think they can be - CuseFan said it pretty efficiently.

If they have no requirement i.e. no hours, no last day rule, shouldn't you also check how the top heavy is determined i.e. if no last day rule (assuming it is a t/h plan)? I agree on the testing exclusions but no sure about the contribution requirement. Just curious.

On ‎11‎/‎19‎/‎2020 at 8:38 AM, Bird said:

I phrased the question awkwardly - I know they can be excluded and not get a contribution, but can they be excluded from testing (i.e. ignored/treated as if they don't exist)?  Say we have an owner and 1 NHCE; the NHCE leaves.  No 401(k), no SH, just PS.   In a standardized plan, the plan language would exclude the NHCE.  In a non-standardized plan with groups, and no allocation conditions, I don't think they can be - CuseFan said it pretty efficiently.

The plan document typically doesn't tell us who is included or excluding from the testing population.  That's a matter of looking at IRS regulations and other relevant guidance.  Yes, you can exclude those not employed on a snapshot date if you are using a snapshot date testing method.  Yes, you can exclude terminated employees with less than 501 hours of service if you are not using a snapshot date testing method.  The resolution of these questions doesn't have anything to do with the fact that the plan assigns each employee to his/her own allocation group.

I still feel like I'm not communicating well with you, Bird, so I apologize if I've misunderstood your question again.  I feel like I must be missing some nuance.

I think this is the section that Bird is referencing. this is from 1.410(b)-6 Excludable employees

(f) Certain terminating employees -

(1) In general. An employee may be treated as an excludable employee for a plan year with respect to a particular plan if -

(i) The employee does not benefit under the plan for the plan year,

(ii) The employee is eligible to participate in the plan,

(iii) The plan has a minimum period of service requirement or a requirement that an employee be employed on the last day of the plan year (last-day requirement) in order for an employee to accrue a benefit or receive an allocation for the plan year,

(iv) The employee fails to accrue a benefit or receive an allocation under the plan solely because of the failure to satisfy the minimum period of service or last-day requirement,

(v) The employee terminates employment during the plan year with no more than 500 hours of service, and the employee is not an employee as of the last day of the plan year (for purposes of this paragraph (f)(1)(v), a plan that uses the elapsed time method of determining years of service may use either 91 consecutive calendar days or 3 consecutive calendar months instead of 500 hours of service, provided it uses the same convention for all employees during a plan year)

Essentially, if you have a requirement that someone complete 1000 hours OR be employed on the last day in order to be eligible to receive a contribution, then you get to exclude terminated employees with less than 501 hours of service from 410(b) coverage testing. This is irrelevant to the grouping method.

But, if you don't have those requirements and instead just use the individual grouping to not make a contribution to this terminated participant, you have to include them in 410(b) coverage testing.

I agree with Bill's post above.  I was wrong before.  The IRS regulation (thanks, Bill, for quoting it) contrary to my recollection does depend on what the plan's provisions are.

The regulation states that all five requirements must be met.  (iii) is not met.  Therefore, we can't use the "exclude terminated employees with < 501 hours of service rule" from (v).

Strongly consider switching to using a last day of the plan year snapshot date testing method to circumvent the testing difficulty.