Gilmore

So for the ADP test the deferrals used would be only the deferrals made during the 3 month wait to receive safe harbor? If so, would you also use only the compensation earned during the period the participant was not eligible for safe harbor? So assuming the 90 day wait, a participant is hired January 1 and is eligible to defer immediately, but not eligible for safe harbor until April 1. The ADP test for that participant would be the deferrals made and compensation earned from January 1 through March 31? And for the plan year you would need to capture the deferrals and compensation for all similarly situated participants to include in the ADP test?

I was listening to a discussion the other day regarding dual eligibility in safe harbor plans. One individual mentioned that they had clients who allowed immediate entry for deferrals but had a 3 month wait for the safe harbor match. I know you can use disaggregation to require a participant to earn the statutory entry requirements before they are eligible for safe harbor, the caveat being that ADP testing is required for that group, which could include HCEs, and the plan would not be deemed to be non-top heavy, but I'd never heard that you could have dual eligibility as was described. Has anyone had any experience with that type of design? I had always thought that once you were eligible for deferrals you were eligible for safe harbor (at least the NHCEs), notwithstanding the disaggregation option. Thanks.

ESOP, your 2015 question does not fit Jakyasar's original fact pattern, which indicated that the employees became participants on January 1, but your question was interesting, thank you for sharing that. So Mike and Austin's opinion was that the employee is counted as a participant on the date they actually met the requirement to be a participant and not the retroactive entry date. Makes sense. What did you decide?

Under the circumstances you describe, we would also use the 10 that satisfied the entry requirements on 1/1/2020 as the beginning count.

Be sure to check for accrual requirements, like a last day rule, too.

If this is an adoption agreement/basic plan document format you may want to check the underlying language as well as the actual amendment. In the past we had a document in which the underlying document language specifically stated that anyone that was a participant prior to the effective date of the amendment remained a participant.

I always wonder in these situations if the Investment Group owns other companies and now the new company is part of a controlled group.

Great, thanks Lou.

A new 401(k) plan is setup later in 2020 with an effective date of 1/1/2020. Profit sharing effective 1/1/2020, deferrals and 3% SH Nonelective effective 10/1/2020. All ees hired on or before 1/1/2020 are eligible for the plan. Comp is full year comp (not date of participation). Employee is hired in 2019 and thus a participant in the plan on 1/1/2020, but terminates on 8/1/2020. Question: Is this participant required to receive the 3% safe harbor because they were eligible to participate in the Plan on 1/1/2020, or do they not receive the safe harbor because the safe harbor portion of the plan was not in effect until after their date of termination? Thanks very much.

Thanks Luke. That was my understanding, but I guess it also depends on the detail in the plan document.

Is an amendment needed for this?

Yes, I believe the additional restriction would have to be included in the description of the hardship distribution terms. In our document software there is an "Other" limitation section to limit describe further limitations. That additional language would be captured in the SPD. I would think any document that allowed for additional limitations would also add the additional language in the supporting ancillary documents, but I suppose it might not, which would be a consideration for adding or not adding as you indicate Peter. Pam, so you are thinking that although circumstances may have changed for the participant making the further payment of the outstanding balance a hardship, the fact that the expense originated two years prior negates the hardship?

A plan is using the safe harbor rules for hardship distributions. A participant incurred a medical expense in 2019 and has been paying the bill off over time. There is currently an amount still owed on the original expense. Two questions: 1. Assuming the document is silent on this specifically, can the participant request a hardship for the amount of the medical expense that is still outstanding even though the original expense occurred two years ago? 2. If #1 is a "Yes", assuming the plan document allows for additional hardship restrictions, is it acceptable to say for example, that hardships will only be allowed for an expense that occurred no more than 6 months from the date of the request? Thanks very much.

There are a few permissible withdrawals a year, and no they probably do not need the extra 3 months but I want them to know all of the consequences involved in whatever they decide to do.

Thank you very much for the responses. I also asked an ERISA attorney after posting. The response that I received was that a mid year change would risk losing EACA status, and agreed with you both that keeping the prior defaults at 3% would violate the uniformity rule. He suggested that the only way to do so would be to amend the plan to have the EACA only cover new participants, which means no 90 day withdrawals for any defaults prior to the amendment and no 6 month testing window.

Client has an existing EACA. Plan is a calendar year plan. The EACA provisions state that all ees who make an affirmative election remain covered under the EACA. Question 1: Mid Year increase Am I correct that making this change mid year would cause the ACA to no longer qualify as an EACA? Question 2: Previously defaulted EEs Let's assume for the sake of Question 1 that they are going to wait until 1/1/2022 to make the change, and assuming the document does not state specifically, is it permissible for the previously defaulted ees to remain at the old default rate? Or, because all ees are still covered under the EACA, would they need to be increased to the new default rate to avoid a conflict with the "Uniformity Requirement"? Thanks very much.

I believe you could make the effective date retroactive to 1/1/2021 with discretionary profit sharing and the deferral and safe harbor portion prospective, such as your 4/1/2021 start date for those portions of the plan.

Pam's suggestion is spot on. There are plenty of payroll services or recordkeepers that can automate the transfer of the assets once payroll has been run.

Thanks guys for the clarifications and letting me beat that to death. It's just interesting to me that in making the instructions more equitable between partners and 2% S-corp shareholders they swung it now more in favor of the shareholders. Practicality aside, it's just interesting.

So if I'm understanding correctly, I have a partnership with an unrelated individual and we each have our child working with us, just the four of us. We file an SF. We incorporate as an S-Corp and now we can file an EZ? Thanks.

Thank you CB, I definitely missed that. Why would the addition of attributed owners apply only to 2% shareholders only do you think?

CB, would you mind clarifying what you mean by "children, parents and grandparents"? Thanks very much.

Notice 2020-52 made it clear last year that safe harbor contributions for HCEs can be suspended mid-year without effecting the plan's safe harbor status (notice required), as contributions made for HCEs are not included in the definition of safe harbor contributions. Since safe harbor contributions are generally required for the entire plan year, would I be correct that a mid year amendment to include HCEs back in the safe harbor match would not be permitted? For example, HCEs are amended out of the safe harbor in 2020. 2021 the company begins to recover and would like to add the safe harbor back for the HCEs. NHCEs were never affected. Yes, it can be done, retroactive to the beginning of the plan year? Or, no way, need to wait until next year? Thanks very much.

Hey thanks CB, that was my question.

A 401(k) plan excludes some compensation for allocation purposes. 414(s) passes the ratio test, but ADP results, although failing using gross and net comp, are better using gross comp. Here is the question. Suppose a participant's gross comp is $40,000, and for extremes let's say allocation comp is $10,000. Let's say we give the participant a QNEC of 20% of allocation compensation, which is 5% of gross compensation. This the only ee getting a QNEC so the representative rate would be 0. If we are using gross compensation in the ADP test, are we allowed to use the full $2000 QNEC (as 5% of testing compensation) in the ADP test, or are we limited to 5% of allocation compensation, even though we are not using allocation compensation in the ADP test? Thanks very much.