A nonstandardized plan may exclude groups of employees from the plan, provided the plan passes coverage testing. What groups of employees may generally be excluded from a nonstandardized prototype plan?
Rev. 03/30/07, E-mail Alert 2007-4

The IRS permits certain group exclusions, provided coverage testing under Code Section 410(b) is always passed for each year in which the group is excluded. The groups of excluded employees must be selected on a nondiscriminatory basis.

The list of such groups includes:

• Employees compensated on a particular basis such as hourly or salaried.
• Employees working in a specific company, subsidiary or division. Employees working in a specific job function such as cook or dish washer.
  
• Leased employees. (This should not be confused with the leased employee safe harbor available under the law that has a 20% threshold).
  
• Highly compensated employees.
  
  

IRS Regulation 1.410(b)-4(b)
This regulation permits exclusions based on classifications that are based on reasonable business criteria to identify the category of employees who benefit under the plan. The following criteria have generally been determined to constitute the basis for a reasonable classification:

• specified job categories
  
• nature of compensation i.e. hourly or salaried
• geographic location
  
• bona fide business criteria of a similar nature
  An enumeration of employees by name or other specific criteria, such as age, is not considered a reasonable classification under this regulation.
  
  

Finally, there are specified statutory exclusions (these groups may be excluded from participation by either standardized or nonstandardized plans):

• Employees included in a unit of Employees covered by a collective bargaining agreement between the Employer and Employee Representatives. This applies if benefits were the subject of good faith bargaining, and if two percent or less of such employees under that agreement are “professionals” (as defined in Treas. Reg. §1.410(b)-9). For this purpose, the term “employee representative” does not include any organization where more than half of the members are owners, officers or executives of the Employer.
  
• Employees who are non-resident aliens who receive no income from sources within the United States.
  
• Individuals who become Employees as a result of an asset or stock acquisition, merger, or other similar transaction involving a change in the Employer or the Employees of a trade or business. This is only a temporary exclusion, and such Employees are excludible only for the period beginning on the date of the transaction and ending on the last day of the first Plan Year beginning after the date of the transaction. A “Code Section 410(b)(6)(C) transaction” is an asset or stock acquisition, merger, or other similar transaction involving a change in the Employer or the Employees of a trade or business.