Immediate 401(k) entry, but 1 year wait for s/h match?

[Santo Gold]

I know this has been discussed before, but I am having trouble finding the previous posts. Can a 401(k) plan with immediate entry for 401(k) purposes, impose a 1 YOS eligibility requirement before eligibility is met to share in the safe harbor match?

Thanks

[Guest dbvail]

No.

[Tom Poje]

you can exclude the 'otherwise excludables'.

1.401(k)-3(h)(3) . plus the last sentence of that paragraph says see 1.401(k)-1(b)(4)(vi) example 2

the plan would be subject to top heavy rules. the otherwise excludables would have to be tested for ADP but probably no HCEs anyway.

what you cant do is impose a last day or hours provision to receive the match.

[Guest fresno]

This is a somewhat related issue.

In a safe harbor plan (Basic Match), is there a problem with liberalizing the eligibility during the year? The Plan is a calendar year and currently uses 6 months of service for eligibility and the client is interested in changing to 3 months.

The discretionary profit sharing provision has a 1,000 hours and last day requirement, so I don't believe there would be a curtailment/preservation concern in changing eligibility.

The safe harbor notice would be updated to clarify the change and would be provided to those newly eligible. No highly compensated would benefit from this change and the plan is not top heavy.

[Guest HiKidsImASrPensionAdmin]

As Tom pointed out, the plan will be subject to top heavy rules. I've had to explain to one too many dentists why the on-call dental assistant "that only worked 15 hours this year" had to receive a contribution of 3% of her pay. Make sure the client understands this from the start!

[Sully]

This is a somewhat related issue.

In a safe harbor plan (Basic Match), is there a problem with liberalizing the eligibility during the year? The Plan is a calendar year and currently uses 6 months of service for eligibility and the client is interested in changing to 3 months.

The discretionary profit sharing provision has a 1,000 hours and last day requirement, so I don't believe there would be a curtailment/preservation concern in changing eligibility.

The safe harbor notice would be updated to clarify the change and would be provided to those newly eligible. No highly compensated would benefit from this change and the plan is not top heavy.

I do not think you can change the plan provisions during the plan year and still be considered a safe harbor plan. See 1.401(k)-3(e)(1).

[Tom Poje]

I would tend to agree, though I don't know if the issue of making things more lenient has ever been addressed.

One possible argument is that some NHCEs were not allowed to defer for '3 months of the year' (e.g. plan was 6 months now it is only 3 months eligibility) therefore, one could possibly argue that their rate of match would be less than the HCEs, a clear violation of the safe harbor rules.

[Kevin C]

I think the regs are saying you can't change the safe harbor provisions during the year, not that you can't change other plan provisions. The ADP and ACP safe harbor sections of the regs specify the contribution that all eligible NHCE's must receive. Eligible employees are those who are eligible to defer for all or a portion of the plan year. If all you are changing is the eligibility requirements for making deferrals, I don't see how that is changing one of the safe harbor provisions.

This would be a good question for the next ASPPA IRS Q&A session. I'd also like to hear the IRS's opinion about whether you can increase the safe harbor contribution during the year.

Tom, can you elaborate on the situation you are thinking would be a problem with the matching rates? If the matching rate is determined using full year comp, wouldn't the employee's deferral rate be determined using full year comp, too?

1.401(k)-3(e)(1) General rule. --Except as provided in this paragraph (e) or in paragraph (f) of this section, a plan will fail to satisfy the requirements of section 401(k)(12) and this section unless plan provisions that satisfy the rules of this section are adopted before the first day of the plan year and remain in effect for an entire 12-month plan year. In addition, except as provided in paragraph (g) of this section, a plan which includes provisions that satisfy the rules of this section will not satisfy the requirements of § 1.401(k)-1(b) if it is amended to change such provisions for that plan year. Moreover, if, as described under paragraph (h)(4) of this section, safe harbor matching or nonelective contributions will be made to another plan for a plan year, provisions under that other plan specifying that the safe harbor contributions will be made and providing that the contributions will be QNECs or QMACs must also be adopted before the first day of that plan year.

[Tom Poje]

Kevin:

I will add the question to the Q and A's for the fall. (I have the power - no really, I am involved on the IRS Q and A committee so I can do things like that))

would your reasoning stay the same if an HCE (owner's son) had only worked only 3 months and was now able to get the safe harbor instead of waiting 6 months?

[Kevin C]

Tom, I don't think that situation would change anything in my reasoning regarding the safe harbor. But, it would raise another issue about whether the amendment itself was discriminatory. If the only person added by the amendment was an HCE, I think it would be a problem.

[wsp]

Tom, I don't think that situation would change anything in my reasoning regarding the safe harbor. But, it would raise another issue about whether the amendment itself was discriminatory. If the only person added by the amendment was an HCE, I think it would be a problem.

Would it still be a problem if that amendment was left in place? Certainly the amendment would be driven by the fact that they are getting an HCE in earlier, but if it serves to eventually benefit other NHCE's would it still be considered discriminatory?

As far as increasing the safe harbor contribution amount as Tom threw out there...wouldn't that be dependent upon the plan document? I'm not using cites for this, just my own not so common sense. But seems to me that if it's a match based upon payperiod by payperiod compensation without a catchup match provision then you're providing differing levels of match contributions aren't you?

[Kevin C]

I think the issue about the amendment being discriminatory is tied to the timing of the amendment {1.401(a)(4)-5}. The determination is facts and circumstances, so everything is taken into account.

The annual match rate issue you mentioned can come up even if the formula doesn't change during the year. Suppose I enter the Plan on 1/1 but don't start deferring until 7/1 and then defer 8% for the rest of the year. The Plan uses a SH match of 100% of the first 4% deferred on a payroll by payroll basis with no true up and the match is deposited timely. On an annual basis, I've deferred 4% and received a 50% match. If I had consistently deferred 4% all year I would have received a 100% match. Does that mean the Plan's SH match doesn't work?

1.401(k)-3©(5)(ii) says that a plan will not fail to satisfy the SH match requirement merely because the SH match is allocated separately for each payroll. Notice 2000-3 Q&A 2 said the SH match requirements could be satisfied separately for each payroll. The new regs don't have the same language, but I think they get you to the same place. If the match would satisfy the SH requirements separately for each payroll, it seems to me that the only reason you are seeing different annual match rates is that the Plan allocates the match separately for each payroll period.

Please note that I am NOT saying you can increase the SH formula during the year. I read the regs as saying you can not change the SH provisions during the year.