IRS Attacks 401k Part-time Employee Exclusions and Your Determination Letter is useless…..
The IRS issued the February 14, 2006 Quality Assurance Bulletin (”QAB”) dealing with 401k plan exclusions of part-time, temporary, and seasonal (A.K.A. “part-time”) employees. T
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.
Why the Attack ?
As 401(k) plans have matured, newly recruited employees are no longer willing to wait the traditional 1000 hour, one-year eligibility period to begin participating. Many employers are liberating their traditional 401k plans of a 1000 hr year wait by allowing immediate eligibility, at least for the deferral portion of the plan.
Other employers, while permitting immediate eligibility, wish to also avoid covering part-time employees because of :
(1) the negative effect on the ADP test as part-timers seldom contribute and will be counted as a zero.
(2) the administrative costs of adding and deleting new employees and
(3) the part-timers’ zero balance will prescribe a top heavy contribution.
Employers are now looking to provide immediate deferral entry and simultaneously exclude part-timers as a classification.
The Problem:
Treas. Reg.
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