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The Risks of Excluding Part-Time and Seasonal Employees from Qualified Retirement Plans*
By: Karla Maschmeier
Karla.maschmeier@wilaw.com
414.276.5000
As more and more businesses are using part-time workers to address their hiring needs, it is important that employers consider how these workers affect their qualified retirement plans. In particular, employers whose plans exclude part-time, seasonal or temporary workers need to be especially concerned about this issue because earlier this year, the IRS issued guidance indicating that any plan containing language excluding part-time, seasonal, temporary, or any other classification of employees will be scrutinized.
If your plan contains a provision excluding these workers, you should review your plan to determine if the plan contains language allowing part-time, seasonal, temporary or other classifications of workers into the plan if the employee completes 1,000 hours of service in an eligibility computation period. This type of fail-safe provision acts to override the part-time classification and allows those employees into the plan. If an employer's plan does not have a fail-safe provision, the employer should consult their attorney regarding using the IRS Voluntary Correction Program (VCP) to correct the document failure. Employers should also consult their attorneys if, despite a fail-safe provision in the plan, part-time workers who complete 1,000 hours of service have been excluded from participation.
It can be costly for employers to correct this kind of plan defect. The correction method required under VCP is for the employer to include the improperly excluded employees into the plan and make contributions (plus attributable earnings) on behalf of those employees for each plan years in which they were improperly excluded. In the case of a 401(k) plan, the required contribution for each improperly excluded employee would be an amount equal to the average deferral percentage of the employee's testing group for non-discrimination testing purposes (highly or non-highly) plus a matching contribution (if the employer made a match) and attributable earnings on the deferral and match amounts, for each plan year in which the employee was excluded. This puts each employee in the same position he or she would have been in had he or she not been excluded from the plan. Despite the costs of voluntary correction, going through the correction program is much more cost effective than having the plan defect discovered during an IRS audit because the IRS would impose a sanction in addition to requiring the employer to provide contributions and earnings for the excluded employees.
Employers can continue to exclude certain classifications of workers from their plans as long as the plan also provides that employees working at least 1,000 hours will be eligible to participate. Employers may also accomplish the same goal by excluding certain employees from the plan by name, or by job description. Careful plan design can allow employers to accomplish their objectives while not running afoul of IRS guidance.
* This article is an excerpt of an article that will be appearing in an upcoming issue of the Employee Benefit Plan Review.
All information appearing in this article is for informational purposes only and is not legal advice. This article does not create an attorney-client relationship with any reader. Do not act upon any information contained in this article without seeking professional legal counsel.
