Are Simple 401(k) Plans subject to 410(b)?

[Guest Joe Vasko]

I have a client who sponsors a Simple 401(k) plan for his employees and provides the 3% match, but the only two employees who participate are the owners. If the Plan is subject to 410(B), then wouldn't he have to use the 2% nonelective contribution?

[Belgarath]

If the plan excludes employees for reasons other than age or service, then the plan would have to pass 410(B) coverage. But as long as employees aren't excluded for other than age or service, if the eligible employees choose not to defer, then you're still all set.

[Appleby]

Belgarath

My understanding is that an employer is not permitted to implement any conditional requirements for participant to receive matching contributions under a SIMPLE 401(k), except that they must meet the eligibility requirements. Wouldn’t this mean that 410(B) does not apply to SIMPLE 401(k) pkans?.

[Belgarath]

Appleby - no I don't agree that SIMPLE 401(k) plans are exempt from 410(B). The SIMPLE(K) plan is basically subject to all normal qualified plan requirements other than those specifically modified or exempted. It is subject to 410(B). The eligibility requirements for age and service under 401(K)(2)(D) still apply, so you can't require anything beyond the requirements of 410(a)(1) in terms of age and service (i.e. age 21 and 1 year of service). But you can exclude by classification, such as hourly employees. However, if you do, you'll have to pass 410(B).

Now, most SIMPLE(K) plans (as far as I know) cover every employee who meets the age and service requirements, if any, and don't exclude by classification. If you do this, you're going to pass 410(B) anyway, and there's no need to worry about it. But you can exclude people if desired and appropriate.

[Guest Joe Vasko]

Belgarath,

I agree. If every eligible employee (1 year of service and age 21) is given the opportunity to participate in the 401(k) plan this would automatically satisfy 410(B). However, if only the HCEs are receiving matching contribution wouldn't this fail 410(B).

Thanks

[Belgarath]

Hi Joe - sorry, I didn't realize you had asked a question in your last response.

No, there's no violation of 410(B) in the situation you describe.

The 410(B) rules for 401(k)/(m) plans are set up differently than for other 401(a) plans. For other 401(a) plans, 410(B) is tested by who actually benefits. For 401(k)/(m) plans, the test is based on those who are eligible to participate. So once you pass 410(B) for coverage, by using eligibility as discussed earlier, then you're all set. The ADP/ACP tests don't apply to the SIMPLE(k) plans, assuming you have met the other requirements.

Hope this helps.