How do Union Plans or Union Employees Affect Qualified Plans?
By Cathy Corrado, QKA
Working with plans that include both nonunion and union employees is not as intimidating as it may seem. There are a few things to keep in mind if you work with a plan that manages both employees that are a part of a union and those that are not union employees. Who is a union employee? Union employees are workers who belong to labor unions. These labor unions negotiate with employers on behalf of their members to improve their pay, benefits, workplace conditions, hours, etc. These workers join together or “act collectively” to be able to have a stronger voice when negotiating these benefits. Based on the Bureau of Labor Statistics, in 2023 over 14 million workers were a part of a union. So how does being in a union affect an employee’s qualified retirement plan?
Employers have options when it comes to designing their plan. They will need to determine whether they are going to allow union employees to participate in their plan or whether they will exclude them from participation. So how does an employer know if it is dealing with a union employee? A union employee is someone who is covered by a collective bargaining agreement. Union employees can only be excluded from an employer’s plan as a class if retirement benefits were a subject of good-faith bargaining. If the employer decides to exclude union employees, it must elect this in the plan document to avoid worrying that the plan will be deemed discriminatory. Union employees are often referred to as statutorily excludable employees and they can be excluded from the IRC Sec. 410(b) coverage test that applies to nonunion employees.
If a plan allows both union and nonunion employees to participate, then it must disaggregate the union from the nonunion employees for coverage testing (Treas. Reg. 1.410(b)-7(c)(4)). A union-only plan or the disaggregated union portion of the plan is automatically deemed to pass coverage testing. The employer will only need to perform coverage testing on the nonunion employees (Treas. Reg. 1.410(b)-6(d)). (Special rules apply to multiemployer plans that cover nonunion employees, but that is outside the scope of this article.)
If the plan excludes union employees and the employee leaves the union and becomes a nonunion employee, she may be eligible to participate in the plan if she satisfied the plan’s age and service requirements and met an entry date while they were in the excluded class. The plan will need to review their plan document to determine if compensation will be determined from entry date or for the full plan year.
What other areas of the qualified plan provide exclusions related to union employees?
1. SECURE Act of 2019 and SECURE Act of 2022: Union employees are excluded from the long-term, part-time provisions. Statutorily excludable employees under IRC Sec. 410(b)(3) are not included and do not need to be pulled into the long-term, part-time eligibility requirements.
2. Top-Heavy Testing: If a plan is deemed to be top-heavy, then the minimum contributions do not apply to union employees. If a plan covers both union and nonunion employees, they are disaggregated for coverage and nondiscrimination testing rules, meaning that they are tested separately. Top-heavy status is determined by combining the union and nonunion employees together, even though the employees are not subject to the minimum contribution requirements. If there are both union and nonunion plans and the union plan has a key employee, the union plan must be aggregated with the employer’s nonunion plan for top-heavy testing. If there are no key employees in the union plan, the plans would not be aggregated.
3. ADP/ACP Testing: If the plan allows both union and nonunion employees to participate in the plan, regulations require that union and nonunion employees be mandatorily disaggregated for ADP and ACP testing.
4. Safe Harbor CODA Contributions: If the plan does not provide safe harbor contributions to all employees who are eligible to make deferrals, then the plan will be subject to ADP and potentially ACP testing. For example, if the employer allows both union and non-union employees to defer, but only allows non-union employees to receive the safe harbor contribution, they will be subject to testing.
5. Top-Paid Group: Union employees can be excluded from the top-paid group HCE determination, but only if at least 90 percent of total employees are in a union and the plan does not cover union employees.
A number of factors may enter into an employer’s decisions on whether to include union employees in its retirement plan(s). Employers should confer with their legal counsel and/or tax professional to assist them in determining what will work best for their business.
