Plan has immediate entry, no eligibility requirements for full-time employees. Can the plan impose a 1-year service requirement on part-time employees?

Robert Rickter, from Corbel, at a seminar said you can exclude those expected to work less than 1,000 hours but you had to have language in the Plan that if any of them did work 1,000 hours in a year, they had to come in to the Plan. And he said this language would be in the next corbel volume submitter.

I'm not sure this would work. All participants would either have immediate eligibility, or would have a year of service requirement where a year of service is defined as 1,000 hours. All GUST pre-approved document should have this language because it is part of IRS Code section 410(a)(1).

The IRS released a Quality Assurance Bulletin on excluding part-time employees in early 2006. Take a look at that QAB. It is at http://www.irs.gov/pub/irs-tege/qab_021406.pdf.

Based on the explanation in the QAB, I think it would be very difficult to design a plan which grants immediately entry to full-time employees but holds part-time employees out until they work 1,000 hours.

See the technical update from Relius


http://www.relius.net/news/technicalupdate...?ID=333&T=P


Plan Design. The QAB indicates that a plan may exclude part-time employees as long as the employer designs the provision in such a way that there is no possibility of indirectly imposing an hour of service requirement in excess of the Code §410(a)(1) statutory maximum. The QAB gives examples of which plan provisions are permissible and impermissible clauses.

The first example suggests a plan with a one year eligibility provision could exclude part-time employees as long as the plan defined part-time employees as anyone who actually works less than 1,000 hours of service. This exclusion serves no purpose because the usual statutory one year eligibility provisions would prevent any part-time employee who actually works less than 1,000 hours (determined at the end of the computation period) from entering the plan.

However, another example does provide useful guidance on how an employer might design a part-time employee exclusion. Generally, a plan provision that excludes an employee who “is scheduled” to work less than 1,000 hours of service is impermissible because the employee could work more than 1,000 hours but still be excluded. However, the IRS indicates that the employer could salvage the provision by including fail-safe language for the situation where the employer works more than 1,000 hours of service during a computation period. Such a provision could operate as a prospective exclusion (subject to the fail-safe). In effect, in a plan with immediate eligibility, this creates 2 sets of eligibility conditions, one for full-time employees (immediate entry) and one for part-time employees (one year of service). Consider the following example:

Example. Corporation X maintains a calendar year 401(k) plan. The plan is top-heavy, provides for immediate eligibility for deferrals and provides for matching contributions (either after completion of one year of service or immediately). The plan also excludes part-time employees. The plan defines a part-time employee as any employee who is scheduled to work less than 1,000 hours of service. If a part-time employee actually works more than 1,000 hours of service during a computation period (despite not being “scheduled” to do so), the employee will become a participant on the first semi-annual plan entry date following the computation period. X hires two part-time employees on November 1, 2006 (A and B). Their job description indicates they normally will work 15 hours/week or less, thus they are “part-time” and excluded under the plan’s definition. However, the plan admits all remaining employees who are not part-time immediately. During their initial computation period, A works 550 hours and does not become a participant. B, on the other hand, ends up working 1,100 hours during the computation period and will become a participant on January 1, 2008. Neither A nor B will be able to defer or receive a top-heavy minimum during the 2006 and 2007 plan years or otherwise be considered a plan participant. B will be eligible to defer in 2008, and therefore is eligible to receive a top-heavy minimum contribution for that year.

The employer can eat its cake and have it, too. So long as the appropriate fail-safe language is in the plan, to assure that the plan will always satisfy 410(a), the plan can exclude part-time employees as a classification until they meet the year of service requirement, even though full-time employees enter immediately.

Would letting full-time employees in immediately but not part-timers be a BRF that would need to be separately tested?