New hire rollovers don't trigger immediate coverage testing requirement.

• Author: Meyer, Patrick

In general, employees can be excluded from entering a retirement plan until they have attained age 21 and completed one year of service. Until recently, it was unclear whether plans that waived the eligibility requirements solely for rollover contributions by newly hired employees were forced to take such employees into account when conducting coverage and nondiscrimination tests under Sec. 410(b). The concern was that the inclusion of these employees would create an added challenge in satisfying these testing requirements, because the employees would often be nonhighly compensated and unable to make deferrals under the terms of the plan until the service requirement was met.

In Rev. Rul. 96-48 the IRS ruled that for qualified plan coverage and nondiscrimination testing purposes, a Sec. 401 (k) plan may exclude employees who are allowed to make ronover contributions to the plans trust but have not yet satisfied minimum age and service requirements for participation in a plan year. This ruling makes clear that Sec. 401(k) plans can allow newly hired employees to roll over assets into the plan immediately, rather than waiting until the employee has satisfied the plans age and service requirements. Allowing new hires to make immediate rollovers without the burden of including these employees for coverage and nondiscrimination testing purposes @until they meet the plan's age and service requirements) may be helpful in recruiting and should enhance the portability of defined contribution plan assets for employees who change jobs.

Coverage Testing

A qualified plan must generally cover a certain percentage of nonhighly compensated employees to satisfy minimum coverage requirement under Sec. 410(b). Rev. Rul. 96-48 states that a Sec. 40(k) plan providing elective contributions, employee and matching contributions and nonelective contributions is treated as three separate plans for coverage testing purposes. Each of these plans must independently satisfy the coverage tests. According to the Service, employees who make (or are eligible to make)...