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BE CAREFUL IN EXCLUDING 'PART-TIMERS' FROM QUALIFIED PLANS

February 27, 2006

The Benefits Blog passes on an IRS bulletin warning plan sponsors to be careful when they try to exclude "part-time" or "seasonal" workers:

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 IRS 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.

This stuff matters because it could cause a failure to meet tax law "coverage" requirements, potentially trigger a plan disqualification, or at least expensive make-up payments to retain qualification.

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