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401(a)(4) Testing


jpokusa

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If a company adopts a 401(k) plan midyear retroactively to the beginning of the year and an employee met the eligibility requirements at the beginning of the year, but terminates employment prior to the adoption date, must he be included in the 401(a)(4) testing? Must he receive the 3% non-elective safe harbor contribution?

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well Code Section 401(k)-12© says
....if each employee who is not a highly compensated employee and who is eligible to participate in the arrangement in an amount equal to at least 3 percent of the employee's compensation.

since the 401(k) arrangement itself did not start until midyear I would say he wasn't allowed to participate 'in the arrangement' since you can't defer on compensation that is past. (or every write up I have ever seen has always said 'only those NHCEs eligible to defer need get the safe harbor')

so for the deferral portion of the plan, which requires the safe harbor I would hold he is not eligible.

e.g. if the plan wasn't safe harbor and you were to run an ADP test I suppose you could use total comp, but most would use comp from date of participation for deferrals, which for this person would be zero, and as a general rule people with 0 comp are not included.

(but maybe that is my illogic!)

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This is an interesting issue. I think the terms of the plan control, so in the absence of a specific exclusion related to those not employed on or after the adoption date I think the person is in the plan for all legitimate purposes (safe harbor, etc.). But one can't defer until the later of effective or adoption date so 401(k) deferrals (and match) are not included in those purposes.

But 401(a)(4) certainly would be.

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In the Erisa Outline Book (Chapter 2, part B 3) there is a brief blurb about retroactive entry

ee hired April 1 2007 works 1000 hours, quits Feb 10, 2008.

at the end of the initial computation period 3/31/2008 he is officially credited with a year of service.

though he is not employed on 3.31.2008, he is employed on the scheduled entry date (1/1/2008), so the plan must make him a participant on that date.

(The example does not indicate this is in reference to a new plan, but I'm not sure that makes a difference)

of course, in that example the person would have worked less than 500 hours so would be probably be excluded anyway.

I'm not so sure the person is eligible for safe harbor, especially if the plan excludes comp while not a participant. I would think that for those purposes it ties in with the date of participation for deferrals. but if an additional contribution was made then it would be based on total comp. (But I am sure other would disagree)

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