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IRS Attacks 401k Part-time Employee Exclusions and Your Determination Letter is useles implement the one technique to avoid 401k Plan DisqualificationPosted by Roth-IRA-401k on: 2006-03-26 18:44:36 in category:
401(k) [ Print | Permalink / 0 Comment(s) ] The IRS issued the February 14, 2006 Quality Assurance Bulletin dealing with 401k plan exclusions of part-time, temporary, and seasonal (A.K.A. part-time employees. This QAB revolutionizes the way IRS document examiners will look at 401k plan eligibility clauses and warns that inadequately drafted provisions dealing with part-time employees may be disqualifying, regardless of any plan determination letter.
Other employers, while permitting immediate eligibility, wish to also avoid covering part-time employees because of :
The Problem: Treas. Reg. 1.410(a)-3 notes that a service condition requiring more than one thousand hour year of service is invalid. In other words, what matters is that a plan as written, could have a service requirement in excess of the Code 410(a) limits, which is enough to disqualify the plan. Therefore, as a class part-timers can not be excluded.
determination letter may not be relied on with respect to whether a plan's exclusion classifications, if any, violate the minimum age or service requirements of section 410 by indirectly imposing an impermissible age or service requirement. A 2002 Recurring Issue Focus (RIF) told IRS examiners that this would be an audit issue, not a determination letter matter. IRS 401k Attack Effective with the February 14, 2006 QAB the IRS examiners will again challenge 401k plans with the part-time exclusions. Examiners will not be challenging an exclusion classification that is defined without reference to hours of service (e.g., hourly paid employees). The QAB states:
Specialists should take note that the issue of whether a plan is providing a direct or indirect service requirement is not limited to part-time or seasonal employees. Any exclusion classification, whether it be part-time, seasonal, temporary, or any other classification of employees, should be closely scrutinized. Specialists should require that any such classification be clearly defined. Employer's 401k Triumph Plan sponsors should carefully examine their 401k plans if they currently exclude part-time employees from participation. If the plan does not have a fail-safe to assure that the plan will comply with Code 410(a), the sponsor should consider amending the plan.
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