Thank you to the mysterious Pension & Benefits Blogger (previously Beneblogger) for alerting us last week to the IRS’s recent Employee Plans Determinations Quality Assurance Bulletin entitled “Part-Time Employees Revisited.” The Bulletin is an item that every benefits lawyer should have at his or her fingertips. Most enlightening, in my opinion, are the examples which clearly show the IRS’s strong aversion (which has become even stronger now as indicated under this Bulletin) to any exclusion of employees by classification that looks and smells like an “indirect service requirement that could result in the exclusion of an employee that completes 1,000 hours of service.” In other words, a qualified plan cannot exclude folks as a class from participating by classifying them as “part-time” or “seasonal” because they might end up working at least 1,000 hours during the year, resulting in an improper exclusion under the rules.
Also, the Bulletin makes it clear (Example 3) that a plan cannot exclude a group of employees under a generic name like “Class B Employees” without defining in the Plan the specifications for such Class. This is because the IRS wants to make sure that the classification will not be making an “end-run” around the service requirements of the Internal Revenue Code and ERISA, i.e. that the employees are not being improperly excluded because of service.
The IRS even goes on to provide a definition that would meet the rules. The IRS says that “Class B Employees” could be defined as an “employee who is a member of the substitute workforce of the Employer, as distinguished from regular full-time and part time employees, that is a separate employment classification based upon availability to work” and the classification would be acceptable.
See this previous post–Employers Utilizing More Temp and Part-time Employees: Be Wary of Qualified Plan Issues–for a discussion of how improperly excluding part-time employees from a qualified plan can result in the need to make corrections. The post goes on to discuss the correction methods mentioned in Rev. Proc. 2003-44 for making an excluded employee whole. However, please note that the correction method for making improperly excluded employees whole in a 401(k) plan has been softened somewhat since I wrote that post. IRS has been indicating for some time at various conferences and meetings that they will issue a new Revenue Procedure which will provide revised correction procedures for replacing contributions of missed pre-tax deferrals of improperly excluded employees in a 401(k) plan. The new procedures will no longer require making up the full average deferral percentage (“ADP”) contribution for the excluded employee, but instead will only require a make-up contribution of 50 percent of the ADP contribution amount. However, the full match will still be required based upon the full ADP amount.
Also, as BNA reports this week in their Pension & Benefits Reporter, the IRS is also saying that the new Rev. Proc. will provide that replacement contributions for missed after-tax employee contributions will be equal to 40 percent of those missed contributions.