Safe Harbor 401k Plan - ee's haven't met statutory elig

[Guest Robin S. Vatalaro]

In reading Notice 2000-3 Q10, it appears that as long as ee's not having met stat elig but that are elig under the terms of the plan do not have to receive the safe harbor contribution as long as the non stat group meets coverage and ADP on it's own. This may be a dumb question, but are 401k and 410b test passing the only stipulations?

The reason I ask is when I search in Benefitslink for Ntc 2000-3, part of Q10 is cut off and the last sentence seems to state "However, in such a case, the plan must specifically provide that elective contributions (and, if applicable, matching contributions) on behalf of those employees will satisfy the ADP test (and, if applicable, the..." and that's where it ends.

Does this mean that if the plan doc does not stipulate that normal matching contribs must be used to satisfy the ADP test and are 100% vested, then the non stat elig's must receive the safe harbor contribution? I haven't come across the non stat elig issue in practice before, any clarification would be appreciated.

[Tom Poje]

Robin:

It is an option whether to provide a safe harbor contribution to the otherwise excludable group. It should be in your safe harbor notice. For example:

This would be typical to language used in safe harbor notices:

(4) A contribution equal to ______% . This contribution will be made to the ________ .

If you are eligible to make a salary reduction contribution, but have not attained age 21 and completed a __ Year of Service __ Period of Service, you will not be eligible to share in the employer contribution selected above.

You will be eligible to share in the contribution selected above (unless modified by this Notice) when you become a participant in accordance with the SPD.

..............

Now, you are correct, if that group does not receive the safe harbor, you would have to test that group separately. since, hopefully, there would be no HCEs in that group, you should pass anyway.

But, watch out for possible top heavy issues!

[Guest Robin S. Vatalaro]

Thanks Tom, I've seen the light.

[FJR]

Tom - does that mean if your plan was top heavy, then you would owe those people a top heavy min. regardless of stat. exclusion.

If so, it seem like the changes in 2002 under safe harbor match will solve this problem

[Tom Poje]

that is my understanding of the regs, that an ee, elig to defer, must receive a top-heavy contribution even if not eligibile for the profit sharing portion of the plan (e.g. immediate elig for deferral, 1 year wait for profit sharing)

some others on this board have pointed out that documents do exist that even exclude this group from top heavy and have IRS approval. Based on the fact you can exclude these people from safe harbor that would only make sense that it is possible to do this. you have to remember that top heavy rules were written before 401(k)s came into glory, so some issues such as top heavy in 401k with immediate eligibility have never been addressed.

My reading of the new regs in regards to safe harbor and top heavy is that they only apply if no other contributions besides the safe harbor contributions are made.

the wording in the new regs says

"The term top heavy plan shall not include a plan which consists SOLELY of " [a safe harbor arrangement]

In other words, if you make addition contributions (cross tested), then you no longer get the free ride on top heavy.