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14.1 IRC §410(b) Coverage Framework, Testing Group & Statutory Excludable Employees
ASPPA Qualified 401 k
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1 Chapter 1: Plan Qualification Requirements
1.1 IRC §401(a) Core Qualification Requirements & Exclusive Benefit Rule 1.2 Written Plan Documents, Pre-Approved vs. Individually Designed Plans & Restatements 1.3 Anti-Alienation, Qualified Domestic Relations Orders (QDROs) & Claims Procedures
2 Chapter 2: Retirement Plan Types & Structures
2.1 Defined Contribution vs. Defined Benefit Fundamentals & Hybrid Cash Balance Plans 2.2 Profit Sharing, Money Purchase & 401(k) Cash or Deferred Arrangements (CODAs) 2.3 Other DC Designs: ESOPs, SEPs, SIMPLE IRAs, SIMPLE 401(k)s, 403(b)s & 457(b)s
3 Chapter 3: Eligibility & Participation Rules
3.1 Statutory Age and Service Conditions Under IRC §410(a) 3.2 Hours-of-Service Crediting vs. Elapsed-Time Method 3.3 Plan Entry Dates, Dual Eligibility & Computation Periods 3.4 Amending Plan Eligibility Requirements & Explaining Eligibility to Plan Sponsors
4 Chapter 4: Special Eligibility Provisions & Long-Term Part-Time Employees
4.1 Excludable Employee Classifications & Job Categories 4.2 SECURE 2.0 Long-Term Part-Time (LTPT) Rules (500 Hours / 2-Year Standard) 4.3 Breaks in Service, Re-Employment Rules & Service Re-Crediting 4.4 Service Across Employers: Predecessor Employers, M&A Transitions, Leased Employees & Independent Contractors
5 Chapter 5: Vesting Schedules & Forfeiture Handling
5.1 Statutory Vesting Schedules: 3-Year Cliff, 2-to-6-Year Graded & 100% Immediate 5.2 Calculating Years of Vesting Service, Computation Periods & Service Exclusions 5.3 Forfeiture Determination, Timing, Allocation Methods & Re-Crediting 5.4 Mandatory Full-Vesting Events, Vesting Schedule Amendments & the 3-Year Election
6 Chapter 6: Employee Contributions & Deferral Limits
6.1 Pre-Tax Elective Deferrals & Designated Roth 401(k) Contributions 6.2 IRC §402(g) Annual Limits, Age-50 Catch-Up & SECURE 2.0 Super Catch-Up 6.3 Voluntary After-Tax Contributions & Automatic Contribution Arrangements (ACA, EACA) 6.4 Rollover Contributions Into the Plan: Eligible Sources, Direct vs. 60-Day Rollovers & Invalid Rollovers
7 Chapter 7: Employer Contributions & Allocations
7.1 Employer Matching Contributions: Fixed, Discretionary & Tiered Formulas 7.2 Discretionary Profit-Sharing: Pro-Rata Comp-to-Comp & Permitted Disparity (Social Security Integration) 7.3 Age-Weighted Allocations, Cross-Testing / New Comparability & Allocation Conditions 7.4 IRC §415(c) Annual Additions Limits, Excess Corrections & §404 Deduction Caps
8 Chapter 8: Safe Harbor 401(k) Plan Design
8.1 Traditional Safe Harbor Formulas: 3% Nonelective vs. Basic and Enhanced Matching 8.2 Qualified Automatic Contribution Arrangement (QACA) Safe Harbor 8.3 Safe Harbor Notice Rules, Mid-Year Elections, Suspension & SECURE 2.0 Flexibility 8.4 Safe Harbor Advantages, Disadvantages & the Top-Heavy Exemption 8.5 Verifying Safe Harbor Contribution Compliance & Comparing Safe Harbor to Non-Safe Harbor Plans
9 Chapter 9: Participant Loans & Compliance
9.1 IRC §72(p) Statutory Loan Limits ($50,000 / 50% Vested Balance Calculation) 9.2 Loan Terms: 5-Year Amortization, Principal Residence Exception & Interest Rates 9.3 Loan Defaults, Cure Periods, Deemed Distributions vs. Plan Loan Offsets
10 Chapter 10: Plan Distributions & Distributable Events
10.1 Distributable Events: Severance, Death, Disability & Normal Retirement 10.2 In-Service Withdrawals, Hardship Distributions & SECURE 2.0 Emergency Access 10.3 IRC §72(t) 10% Early Distribution Penalty & Statutory Exceptions 10.4 QJSA and QPSA Survivor Annuity Rules, the DC Plan Exemption & Spousal Consent Administration 10.5 Distribution Restrictions by Contribution Source & Plan Termination Distributions
11 Chapter 11: Mandatory Cash-Outs, Taxation & RMDs
11.1 Mandatory Cash-Out Limits ($7,000 Threshold) & Automatic Rollover IRAs 11.2 Taxation of Distributions, 20% Mandatory Federal Withholding & Direct Rollovers 11.3 Required Minimum Distributions (RMDs) Under IRC §401(a)(9) & SECURE 2.0 (Age 73) 11.4 Distribution Tax Reporting: Form 1099-R Codes, Form 945, In-Kind Distributions & Net Unrealized Appreciation
12 Chapter 12: Compensation Definitions for Testing & Allocations
12.1 IRC §415 Statutory Compensation Definitions: W-2, Box 1 & Section 3401(a) 12.2 IRC §414(s) Safe-Harbor vs. Custom Compensation & Nondiscrimination Testing 12.3 IRC §401(a)(17) Annual Compensation Limit & Deemed / Partial Year Rules 12.4 Applying the Plan's Compensation Definition: Components, Payroll Mapping & Common Administrative Errors
13 Chapter 13: Highly Compensated Employee (HCE) Determination
13.1 IRC §414(q) Statutory Tests: 5% Owners & Compensation Lookback ($160,000 Threshold) 13.2 Top-Paid 20% Group Election & Determination Year Mechanics 13.3 Family Attribution Rules Under IRC §318 / §1563 in HCE Determination 13.4 Former HCEs, Short Plan Years & Non-Calendar-Year HCE Determination
14 Chapter 14: Minimum Coverage Testing: Ratio Percentage Test
14.1 IRC §410(b) Coverage Framework, Testing Group & Statutory Excludable Employees 14.2 Calculating Benefiting Participants & The Ratio Percentage Test (70% Standard) 14.3 Testing Frequencies (Daily, Quarterly, Annual) & Controlled Group Impacts 14.4 Deemed-Pass Situations & Correcting a Failed Coverage Test
15 Chapter 15: Minimum Coverage: Average Benefits Test & Aggregation
15.1 The Average Benefits Test: Nondiscriminatory Classification (Safe/Unsafe Harbor) 15.2 Average Benefit Percentage Test (ABPT) Mechanics & Calculation 15.3 Mandatory Disaggregation, Permissive Aggregation & Line of Business (SLOB) Rules 15.4 Otherwise Excludable Employees: When Disaggregation Rescues a Failing Test
16 Chapter 16: ADP and ACP Testing Fundamentals
16.1 Actual Deferral Percentage (ADP) Test: Eligible Participants & Included Deferrals 16.2 Actual Contribution Percentage (ACP) Test: Matching & After-Tax Contributions 16.3 Testing Standards: The 1.25 Test vs. 2.0 / 2% Spread Test & Prior Year vs. Current Year Elections 16.4 Why ADP and ACP Testing Exists & Which Plans Are Statutorily Exempt 16.5 Shifting Techniques: Moving Contributions Between the ADP and ACP Tests 16.6 Permissive Disaggregation & Restructuring to Pass the ADP and ACP Tests
17 Chapter 17: Correcting Failed ADP/ACP Tests
17.1 Calculating the Total Excess: Ratio Leveling vs. Dollar Leveling to Participants 17.2 Corrective Distributions to HCEs: Refund Calculations, Income Allocations & Withholding 17.3 Alternative Corrections: QNECs, QMACs (Bottom-Up vs. Pro-Rata) & Recharacterization to Catch-Up 17.4 Statutory Deadlines: 2.5-Month Rule, EACA 6-Month Window, §4979 10% Excise Tax & EPCRS Self-Correction 17.5 Switching Between Prior-Year and Current-Year Testing: Advantages, Limits & Anti-Abuse Rules
18 Chapter 18: Top-Heavy Testing & Compliance
18.1 Identifying Key Employees: Officers, 5% Owners & 1% Owners (> $150,000) 18.2 The 60% Top-Heavy Ratio: Determination Date, Valuation Date & Account Adjustments 18.3 Top-Heavy Minimum Contributions (3% Rule), Accelerated Vesting & Safe Harbor Exemption 18.4 Required and Permissive Aggregation Groups & Former Key Employees
19 Chapter 19: Government Reporting & Form 5500 Filings
19.1 Form 5500 Series: Form 5500, Form 5500-SF & Form 5500-EZ Eligibility 19.2 IQPA Independent Audit Threshold: SECURE 2.0 100-Participant Account Balance Rule 19.3 Filing Deadlines, Form 5558 Extensions, EFAST2 Mechanics, DFVC Program & Penalties 19.4 Form 8955-SSA: Reporting Deferred Vested Participants & Related Registration Filings
20 Chapter 20: Participant Disclosures & Statutory Notices
20.1 ERISA Title I Disclosures: SPD, SMM & SAR Timing and Content Requirements 20.2 Fee Disclosures Under ERISA §404(a)(5) & §408(b)(2), Plus Blackout Notices 20.3 Electronic Delivery Safe Harbors (2002 & 2020) & SECURE 2.0 Paper Statement Requirements 20.4 Which Service Providers Must Deliver Fee Disclosures & the Sponsor-Level §408(b)(2) Requirement
21 Chapter 21: ASPPA Professional Conduct & Ethics
21.1 ASPPA Code Overview: Precepts 1 through 6 (Integrity, Competence & Courtesy) 21.2 Conflicts of Interest (Precept 7), Confidentiality (Precept 9) & Work Product Control (Precept 10) 21.3 Professional Discipline, ASPPA Disciplinary Board & Fiduciary Boundary Issues
14.1 IRC §410(b) Coverage Framework, Testing Group & Statutory Excludable Employees
Key Takeaways Explain This Topic AI
IRC §410(b) mandates that qualified retirement plans satisfy annual minimum coverage standards to ensure plan benefits do not disproportionately favor Highly Compensated Employees (HCEs) over Non-Highly Compensated Employees (NHCEs).
The coverage testing group is evaluated on a controlled group or Affiliated Service Group (ASG) basis under IRC §414(b), §414(c), and §414(m); all employees of related entities are treated as employed by a single employer unless a statutory exception applies.
Under Treas. Reg. §1.410(b)-6, statutory excludable employees are excluded from both the numerator and denominator of coverage tests: (1) employees failing statutory age/service conditions, (2) union employees covered by collective bargaining, (3) nonresident aliens with no U.S.-source income, and (4) terminated employees with 500 or fewer hours of service who fail an allocation condition.
A terminated employee who completes more than 500 hours of service (e.g., 501 hours) and fails an allocation condition cannot be excluded under the 500-hour rule and is counted as a non-benefiting participant, which harms coverage results.
Under IRC §410(b)(4)(B), an employer maintaining lower eligibility requirements than statutory age 21 and 1 year of service may elect to disaggregate the plan into separate 'Statutory' and 'Early Entrant' plans, protecting the main plan from high-turnover entry-level employees.
Last updated: September 2026
14.1 IRC §410(b) Coverage Framework, Testing Group & Statutory Excludable Employees
Note
The Statutory Gatekeeper of Tax Qualification Internal Revenue Code §410(b) serves as the fundamental statutory gatekeeper ensuring that tax-advantaged qualified retirement plans provide substantial, meaningful benefits to rank-and-file workers rather than operating merely as tax shelters for business owners and executives. Codified alongside ERISA in 1974 and significantly strengthened by the Tax Reform Act of 1986 (TRA '86), IRC §410(b) establishes objective, quantitative minimum coverage standards that every qualified plan must satisfy annually. Failure to satisfy §410(b) results in catastrophic plan disqualification under IRC §401(a)(3) , triggering the retroactive loss of employer deductions, trust taxation, and immediate taxation of vested accrued benefits for Highly Compensated Employees (HCEs) under IRC §402(b)(4) .
For retirement plan administrators and candidates preparing for the ASPPA QKA credential, mastering minimum coverage testing begins with identifying the correct legal employer, defining the testing group across related business entities, and rigorously applying the statutory excludable employee rules. An administrative error in categorizing an employee as excludable or non-excludable corrupts every subsequent calculation, leading to erroneous test conclusions and latent qualification defects.
The Purpose and Scope of IRC §410(b)
The primary objective of IRC §410(b) is straightforward: to prevent an employer from establishing a tax-favored plan that covers predominantly HCEs while leaving Non-Highly Compensated Employees (NHCEs) without comparable retirement savings opportunities. A qualified plan must benefit a nondiscriminatory percentage of the employer's workforce.
Applicable Plans and Statutory Exemptions
Minimum coverage testing applies broadly across qualified retirement plans governed by IRC §401(a), including:
Defined Contribution (DC) Plans : 401(k) Cash or Deferred Arrangements (CODAs), employer matching plans under 401(m), discretionary profit-sharing plans, money purchase pension plans, target benefit plans, and Employee Stock Ownership Plans (ESOPs).
Defined Benefit (DB) Plans : Traditional final-average-pay pension plans and hybrid cash balance plans (which must also satisfy the additional minimum participation requirements of IRC §401(a)(26) ).
Under IRC §410(c) , specific plan categories are statutorily exempt from IRC §410(b) testing:
Governmental Plans : Plans established and maintained for its employees by the Government of the United States, by any State or political subdivision thereof, or by any agency or instrumentality of any of the foregoing (IRC §414(d)).
Non-Electing Church Plans : Church plans under IRC §414(e) that have not made an irrevocable election under IRC §410(d) to be covered by ERISA.
Plans with No HCEs : Under IRC §410(b)(6)(F) , a plan maintained by an employer that has no HCEs in its workforce for the plan year is deemed to satisfy the minimum coverage requirements automatically.
Plans Benefiting Solely HCEs : If an employer maintains a plan where no NHCEs are employed by the employer, or if a plan benefits solely union employees, special coverage safe harbors apply.
Defining the Employer: The Single Employer Doctrine
A critical tenet of qualified plan administration is that coverage testing is never performed on an isolated payroll or separate legal entity basis unless the entities are entirely independent under the Internal Revenue Code. Under the Single Employer Doctrine , all employees of all corporations, partnerships, LLCs, and sole proprietorships that are members of a controlled group of corporations or an affiliated service group must be aggregated and treated as employed by a single employer. +---------------------------------------------------------------------------------------------------+
- | IRC §414 SINGLE EMPLOYER DETERMINATION ARCHITECTURE |
- +---------------------------------------------------------------------------------------------------+
- | |
- | [ PARENT-SUBSIDIARY CONTROLLED GROUP (IRC §414(b) & §1563(a)(1)) ] |
- | • Chain of corporations connected through stock ownership with a common parent. |
- | • Ownership standard: At least 80% of total combined voting power OR at least 80% of total |
- | value of all classes of stock. |
- | |
- | [ BROTHER-SISTER CONTROLLED GROUP (IRC §414(c) & §1563(a)(2)) ] |
- | • Two or more entities owned by 5 or fewer individuals, estates, or trusts satisfying TWO tests:|
- | 1. 80% Controlling Interest: Together own at least 80% of voting power or total value of |
- | each corporation; AND |
- | 2. >50% Effective Control: Together own more than 50% of voting power or total value of each |
- | corporation, taking into account ownership only to the extent identical in each entity. |
- | |
- | [ COMBINED CONTROLLED GROUP (IRC §1563(a)(3)) ] |
- | • Three or more corporations, each of which is a member of either a parent-subsidiary or |
- | brother-sister group, and at least one is a common parent and in a brother-sister group. |
- | |
- | [ AFFILIATED SERVICE GROUPS (IRC §414(m)) ] |
- | • Service organizations and management organizations bound by statutory ownership and |
- | regular performance of professional services (A-Org, B-Org, or Management ASG). |
- | |
- | RESULT FOR COVERAGE TESTING: |
- | ALL EMPLOYEES ACROSS ALL ENTITIES FORM THE INITIAL TESTING UNIVERSE! |
- | A plan sponsored by Entity A must account for all non-excludable employees of Entity B! |
- | |
- +---------------------------------------------------------------------------------------------------+
- Leased Employees: IRC §414(n)
Under IRC §414(n) , an individual who is a "leased employee" must be treated as an employee of the recipient organization for minimum coverage testing purposes. A leased employee is defined as any person who provides services to a recipient organization if:
The services are provided pursuant to an agreement between the recipient and a leasing organization;
The individual has performed services for the recipient on a substantially full-time basis for a period of at least one year (generally 1,500 hours in a 12-month period or 75% of regular hours); and
The services are performed under the primary direction or control of the recipient organization.
Leased employees are included in the recipient employer's non-excludable workforce and counted as non-benefiting participants unless covered under a statutory leasing safe harbor plan maintained by the leasing agency (requiring a 10% non-integrated money purchase contribution with immediate vesting) and leased employees constitute no more than 20% of the recipient's non-highly compensated workforce.
Statutory Excludable Employees: Treas. Reg. §1.410(b)-6
Once the total employer workforce across the controlled or affiliated service group is compiled, the administrator must determine which employees are statutory excludable employees . Statutory excludables are completely disregarded in coverage calculations—they are eliminated from both the numerator (benefiting count) and the denominator (total employee count).
Treasury Regulation §1.410(b)-6 establishes four primary categories of statutory excludables:
1. Minimum Age and Service Excludables: Treas. Reg. §1.410(b)-6(b)
An employee who has not satisfied the statutory minimum age and service requirements of IRC §410(a)(1) as of the close of the plan year may be treated as an excludable employee:
General Rule : The statutory maximum requirements are Age 21 and 1 Year of Service (1,000 hours in an eligibility computation period).
Two-Year Eligibility Exception : For profit-sharing or pension plans (not CODAs) providing 100% full and immediate vesting upon entry, the statutory requirement may be up to 2 years of service.
The Plan's Actual Requirements Rule : If a plan specifies age and service requirements that are lower than the statutory limits (for example, age 18 and 3 months of service), an employee is excludable only if they fail to meet the plan's lower criteria , unless the employer elects early entrant disaggregation under IRC §410(b)(4)(B)!
2. Union Employees Covered by Collective Bargaining: Treas. Reg. §1.410(b)-6(d)
Employees covered by a collective bargaining agreement between employee representatives and one or more employers are statutorily excludable from the coverage testing of the non-union plan, provided retirement benefits were the subject of good-faith bargaining. Conversely, when testing a collectively bargained plan, non-union employees are excludable.
3. Nonresident Aliens: Treas. Reg. §1.410(b)-6(c)
An employee who is a nonresident alien (within the meaning of IRC §7701(b)(1)(B)) and who receives no earned income (within the meaning of IRC §911(d)(2)) from sources within the United States (within the meaning of IRC §861(a)(3)) is statutorily excludable.
Important
The $1 U.S.-Source Income Rule : If a nonresident alien earns even $1 of U.S.-source income during the plan year, they cannot be excluded under the nonresident alien exclusion rule! They must be evaluated under the standard coverage testing rules unless excludable under another statutory provision.
4. Terminated Employees with 500 or Fewer Hours: Treas. Reg. §1.410(b)-6(f)
One of the most heavily tested areas on the ASPPA QKA examination is the special rule for terminating employees who fail to accrue a benefit or receive an allocation. Under Treas. Reg. §1.410(b)-6(f), a former employee is treated as an excludable employee for the plan year only if ALL SIX of the following conditions are met : +---------------------------------------------------------------------------------------------------+
- | TREAS. REG. §1.410(b)-6(f) 500-HOUR TERMINATED EMPLOYEE EXCLUSION CHECKLIST |
- +---------------------------------------------------------------------------------------------------+
- | |
- | [ CONDITION 1: DOES NOT BENEFIT ] |
- | The employee does not benefit under the plan for the plan year. |
- | |
- | [ CONDITION 2: ELIGIBLE TO PARTICIPATE ] |
- | The employee is eligible to participate in the plan during the plan year. |
- | |
- | [ CONDITION 3: PLAN HAS AN ALLOCATION CONDITION ] |
- | The plan has a minimum service requirement (e.g., 1,000 hours) OR a last-day requirement |
- | to receive an allocation or accrue a benefit. |
- | |
- | [ CONDITION 4: FAILED SOLELY DUE TO THE ALLOCATION CONDITION ] |
- | The employee fails to accrue a benefit solely because they did not satisfy the minimum hours |
- | or last-day requirement. |
- | |
- | [ CONDITION 5: ACTUAL TERMINATION OF EMPLOYMENT ] |
- | The employee terminates employment during the plan year. |
- | |
- | [ CONDITION 6: 500 OR FEWER HOURS OF SERVICE ] |
- | The employee completed NO MORE THAN 500 HOURS OF SERVICE during the plan year. |
- | |
- +---------------------------------------------------------------------------------------------------+
- The Critical 501-Hour Line
If a terminating participant completes 501 hours of service (or more) and fails to receive an employer allocation solely because they terminated before the last day of the plan year or failed a 1,000-hour requirement, that participant CANNOT be excluded under the 500-hour rule !
They must be included in the coverage test as a non-excludable employee who did not benefit . In the Ratio Percentage Test formula, this participant adds 1 to the NHCE denominator and 0 to the NHCE numerator, dragging down the plan's ratio percentage!
Active Employees Are Never Excludable Under This Rule
If an employee remains actively employed on the last day of the plan year but completed only 400 hours of service, failing the plan's 1,000-hour allocation requirement, can they be excluded under the 500-hour rule? No! Condition 5 requires an actual termination of employment during the plan year. An active employee with 400 hours who fails an allocation condition is an active non-excludable non-benefiting employee.
Disaggregation of Early Entrants: IRC §410(b)(4)(B)
Many employers design retirement plans with rapid eligibility (e.g., immediate entry upon hire, or age 18 with 3 months of service) to attract entry-level employees. However, entry-level employees frequently experience high turnover, working for a few months before quitting. Under the general rule of Treas. Reg. §1.410(b)-6(b), once an employee meets the plan's stated entry conditions, they can no longer be excluded under the age/service rules.
To prevent generous eligibility provisions from causing coverage failures, Congress enacted IRC §410(b)(4)(B) . Under this statutory election, an employer may disaggregate the plan into two separate component plans for minimum coverage testing purposes:
The Statutory Plan (Otherwise Excludable Rule) : Tests only those employees who satisfy the statutory maximum age and service limits (Age 21 and 1 Year of Service / 1,000 hours).
The Early Entrant Plan : Tests only those employees who have met the plan's lower eligibility conditions but have not yet satisfied statutory age 21 and 1 year of service .
Strategic Compliance Advantage
Both component plans must independently satisfy IRC §410(b). However, in the vast majority of small-to-midsize businesses, all HCEs are older than 21 and have more than 1 year of service. Consequently:
In the Early Entrant Plan , there are often zero HCEs benefiting ( 0 HCEs 0\text{ HCEs} 0 HCEs ). Under Treas. Reg. §1.410(b)-2(b)(6), if a plan benefits no HCEs, it deemed passes IRC §410(b) automatically!
In the Statutory Plan , all high-turnover young and short-service workers are eliminated from both the numerator and denominator, dramatically boosting the statutory plan's coverage ratio.
Comprehensive Comparative Exclusion Matrix
The following matrix summarizes the precise statutory basis, application criteria, and testing impact of each employee exclusion classification:
Employee Classification Statutory Authority Primary Qualifying Criteria Excludable From Coverage? Impact on Ratio Percentage Test
Statutory Age & Service Treas. Reg. §1.410(b)-6(b) Age < 21 OR Service < 1 Year (1,000 hrs) Yes (if plan uses statutory criteria) Excluded from numerator & denominator
Early Entrant (Under Plan Terms) IRC §410(b)(4)(B) Meets plan terms (e.g., Age 18) but < Age 21 / 1 yr Yes, via Disaggregation Tested separately in Early Entrant component
Union Employees Treas. Reg. §1.410(b)-6(d) Bona fide collective bargaining over retirement Yes Excluded completely when testing non-union plan
Nonresident Aliens Treas. Reg. §1.410(b)-6(c) No U.S.-source earned income from employer Yes (Strictly $0 U.S. income) Excluded completely from both groups
Terminated (≤ 500 Hours) Treas. Reg. §1.410(b)-6(f) Terminated during year, ≤ 500 hrs, zero benefit due to rule Yes Excluded from numerator & denominator
Terminated (> 500 Hours) Treas. Reg. §1.410(b)-6(f) Terminated during year, 501–999 hrs, zero benefit NO (Non-Excludable) Included in denominator, 0 in numerator (Hurts test)
Active Employee (< 1,000 Hours) Treas. Reg. §1.410(b)-6(f) Active on last day, worked 400 hrs, missed 1,000-hr rule NO (Non-Excludable) Included in denominator, 0 in numerator (Hurts test)
Part-Time / Seasonal Employees IRC §410(a) / §410(b) Excluded by job title (e.g., 'part-time') NO (Unless < 1,000 hrs / Age 21) Cannot exclude by job title alone; must track hours
Leased Employees (Non-Safe Harbor) IRC §414(n) ≥ 1 yr full-time service, under recipient control NO (Non-Excludable) Counted as non-benefiting NHCEs of recipient
Common ASPPA QKA Exam Traps
Exam Trap 1: The Part-Time Job Title Exclusion : Exam questions often state that the employer's plan document excludes "all part-time employees working fewer than 30 hours per week." Candidates erroneously treat them as statutory excludables. Under ERISA and IRC §410(a), an employer cannot exclude employees by category if they complete 1,000 hours in an eligibility computation period. Unless they fail statutory age/service or the 500-hour termination rule, they are non-excludable participants!
Exam Trap 2: Excluding Terminated Employees with 501 to 999 Hours : A scenario describes an employee who terminates on August 15 after working 650 hours, receiving no profit-sharing allocation due to a 1,000-hour requirement. Candidates frequently exclude this employee because they terminated and received no allocation. They worked more than 500 hours , so they CANNOT be excluded under Treas. Reg. §1.410(b)-6(f). They count in the denominator as a non-benefiting employee.
Exam Trap 3: Active Employees with Fewer than 500 Hours : An employee works 350 hours during the year and remains employed on December 31. The plan requires 1,000 hours for an allocation, so the employee receives nothing. Candidates assume the employee is excludable because hours are ≤ 500. The employee never terminated employment! The 500-hour exclusion applies strictly to terminated employees.
Exam Trap 4: Nonresident Alien with Nominal U.S. Income : An exam item mentions a foreign national working at a foreign subsidiary who visits the U.S. parent for two weeks of training, generating $1,200 of U.S.-source W-2 wages. The nonresident alien exclusion is completely lost for that employee because they have U.S.-source income.
Exam Trap 5: Ignoring Controlled Group Members : An owner owns 100% of Company A (20 NHCEs, covered by 401(k)) and 100% of Company B (50 NHCEs, no retirement plan). The question asks for the denominator of Company A's coverage test. Candidates count only Company A's 20 employees. Because Company A and Company B form a brother-sister / parent-subsidiary controlled group, all 70 NHCEs must be evaluated together!