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You probably saw this but per the EOB. A 4% minimum would, in my mind, not follow the guidance. Minimum deferral rate and minimum increments permitted. Q&A-3 of IRS Notice 2000-3 permits safe harbor 401k plans to require salary reduction elections to be in whole dollar amounts or in whole percentages of compensation. Section V.B.1.c.ii. of IRS Notice 98-52 stated that a safe harbor 401(k) plan could set a maximum limit on elective deferrals, so long as an employee's ability to get the maximum match available under the plan was not compromised, but had to permit the employee to elect to contribute "any lesser amount." The ability to require whole dollar amounts or whole percentages is a reasonable compromise. Thus, a minimum elective deferral rate of 1% of compensation could be required by a safe harbor 401(k) plan. The regulations adopt the Notice 2000-3 approach as well. See Treas. Reg. §§1.401(k)-3(c)(6)(iii) and 1.401(m)-3(d)(6)(iii).

Assuming the loan is allocated to the individual's account as his/her own self-directed investment (100%), then the worst that happens is that the loan defaults and he gets a 1099-R and, if under 59-1/2, has to pay 10% premature distribution tax in addition to regular income tax. The IRS will not be impeded in any collection efforts that it then eventually takes. Not much of an issue for the plan sponsor or administrator. Of course, they could talk to the guy to make sure he understands the consequences.

Yes, both tests are required for the entire plan year using current year testing. See 1.401(k)-3(g)(1)(i)(E) and 1.401(m)-3(h)(1)(i)(E).

Well, in the mid to late '70's, I worked for the insurance company that was the largest small plan service provider in the country; I actually set policy on many of the issues we were figuring out back then. And almost all of those plans were pooled in those days (well over 95%), and they were all handled as noted above.

A sponsor wants to amend their plan to require employees who defer to defer at least 4%. Employees cannot elect a lower percentage unless it is zero. Other than needing to be tested under 401(a)(4) - how would we even do this? Is this permissible? It seems like it would flagrantly disfavor NHCE. Complicating matters is the plan presently has a Safe Harbor match, and plans to keep it for the foreseeable future. Thoughts?