QAB 2006-3 and Restating for EGTRRA
Rev. 06/22/06, E-mail Alert 2006-12; Rev. 08/21/09, E-mail Alert 2009-13

In 2006, the IRS issued Quality Assurance Bulletin (QAB) FY-2006-3 describing the proper exclusion of certain classes of employees from participation. Although the QAB focuses on part timers and seasonal employees, it states that the same guidance is applicable to temporary workers or any other classification of employees.

The Bulletin stresses that if the plan excludes part-time or seasonal employees, an affected individual who completes 1,000 hours of service (and has met the plan's age requirement, if any) within an eligibility computation period must enter and benefit under the plan. The IRS states that its examiners are to look for document wording that could result in the exclusion of an employee who has completed 1,000 hours of service.

IRS Example: A plan’s eligibility provision requires an employee to be age 21 and complete 1 year of service. In addition, the plan excludes part-time or seasonal employees if their customary employment is for not more than 20 hours per week or 5 months in any plan year. This provision could result in the exclusion -- by reason of a minimum service requirement -- of an employee(s) who has completed a year of service. Thus, this plan would not qualify, even if it passed coverage after excluding these employees.

EGTRRA Document Review
The QAB states that IRS document specialists will begin enforcing these principles as part of the EGTRRA document review cycle. Therefore, it is important to watch for this and remove or clarify this type of provision so that it is in compliance when restating from a GUST to an EGTRRA document.

Plan sponsors will be asked to remove or clarify plan language if a reviewer discovers a plan that includes a provision which defines an exclusion classification by reference to service.

To provide further clarification, the QAB gives three additional examples which follow:

IRS Example 1:
Two plans, Plan A and Plan B, both provide for one year of service as a condition of participation. Both plans also provide that employees classified as part-time or seasonal employees shall not be eligible to participate in the plan.

Plan A defines a part-time or seasonal employee as an employee who works less than 1,000 hours of service in an eligibility computation period. This should not be challenged as the plan provision is not imposing a service requirement in violation of IRC 410(a)(1). Any employee that works 1,000 hours or more in an eligibility computation period would not meet the definition of a part-time or seasonal employee and thus would be eligible to participate.

Plan B defines a part-time or seasonal employee as an employee who is scheduled to work less than 1,000 hours of service in a year. Plan B should be challenged as the plan includes a provision that could impose a service requirement in violation of IRC 410(a)(1). The plan language provides that a part time or seasonal employee is one who “is scheduled” to work less than 1,000 hours of service. The plan provision could result in the improper exclusion of an employee who worked more than his “scheduled” hours of service. Plan B would have to be amended to define the exclusion classification in such a way as to avoid imposing an indirect service requirement in violation of IRC 410(a)(1). Plan B could also be amended to include “fail-safe” language which provides that, notwithstanding any exclusion classifications, any employee that completes at least 1,000 hours of service in an eligibility computation period will be an eligible employee.

IRS Example 2
Plan C provides for one year of service as a condition of participation. Plan C also provides that employees classified as Hourly Paid Employees will be excluded from participation. The plan provides that Hourly Paid Employees are Employees that receive an hourly wage for their services. Plan C should not be challenged, as the plan is not excluding Hourly Paid Employees based on an age or service requirement.

The plan is providing for the exclusion of a class of employees based on their job classification. If the plan defined Hourly Paid Employees as Employees that receive an hourly wage and whose customary employment is not more than 20 hours per week, the plan provision would not satisfy IRC 410 (a) or IT Reg. 1.410(a)-3(e) as the plan provision could result in the plan improperly excluding an employee who worked at least 1,000 hours of service in an eligibility computation period due to the fact that he worked more than his customary number of hours. Plan C would have to be amended in the same manner as Plan B in Example 1.

Example 3
Plan D provides for one year of service as a condition of participation. Plan D also provides that employees classified as Class B Employees will not be eligible to participate. Plan D does not define Class B Employees. Plan D should be challenged to define Class B Employees and the definition should be scrutinized to determine if the class of employees is being excluded based on an age or service requirement that could be in violation of IRC 410(a)(1).

The applicant provides an amendment defining Class B employee as any 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.

Plan D, as amended, is now in compliance with IRC 410(a)(1) in form. The Class B exclusion classification is not based on a specified number of hours of service, but rather on the availability to work.