Safe Harbor Cross Tested Plan

[Guest MEGary]

We have a safe harbor cross tested plan with a 401(k) feature, matching feature which one of the NHCE's terminated with less than 500 hours and receives a 3% safe harbor contribution (she's not eligible for the add'l PS contribution). What should be included in which test? Should her EBAR (including 401(k), match and safe harbor allocations) be included in the 410(B) test? Should she be an excludable employee because she termed with <500 hours? If there were 8 NHCE's, all 8 would have their EBAR's listed, but the avg bene test be calculated by dividing by 7 non-excludable employees? In other words, all 8 NHCE's EBAR would be totaled and then divided by 7 - the number of non-excludable employees?

[Tom Poje]

for the average benefits % test you inlcude evrything and divide by the total number of bodies.

for 410(B) you have:

401(k) includable and benefiting, she could have deferred

401(m) excludable - she couldn't get a match even if she deferred. (Note - she should also not be a part of the the 401(m) test as well - if you have to run one. you did not indicate what the match formula was, but if it was on more than 4% of comp, you would have to run the test)

nonelective - includable and benefiting

for cross testing, remember not to impute disparity on the 3%

[Guest MEGary]

Thanks Tom-

What about 401(a)(4)? She's not eligible for the non-elective contribution, but she receives a safe harbor contribution. Should her EBAR be included in the total benefits and should she be counted as a non-excludable employee?

[Tom Poje]

a safe harbor contribution can be one of two types - a match or

a non elective. In your case, you indicated it was the non elective.

(I jokingly refer to them as SHNECs as opposed to QNECs) Remember, the regs clearly state they can serve for top heavy and cross testing as well. And all nonelectives count in the a(4) test. At least that is my understanding. It would be the safe as top-heavy - those ees wouldn't normally receive anything either! If this individual fell into the category of 'otherwise excludable' then she could be tested separately.

[Richard Anderson]

In order for someone to be excludable because they terminated and did not have more than 500 hours, they must not benefit. Since she received the 3% safe harbor, she is not excludable.

[Guest lforesz]

Hi,

A variation on the same theme. We have a plan that elected the 3% safe harbor nonelective but wants to exclude employees than 1 YOS and 21 from the definition of Eligible Participants for the SH 3%.

Fine, however, they also want to make a profit sharing contributions (design based safe harbor not cross-tested) but the eligibility for this is immediate. My concern is can they exclude ee withn less than 1 YOS from the 3% SH if the eligibility for discretionary PS contributions is immediate?

My concern is this and maybe I'm just paranoid. If someone has less than 1 YOS they would not receive the 3% SH (which our prototype document refers to as a QNEC) but would be eligible for additional profit sharing contributions. So, in that first year, the employee with < 1 YOS would receive 22% and the employee with more than 1 YOS would receive 25% (3% SH and 22% discretionary PS). So, do we still have a safe harbor PS allocation? In other words, is the 3% SH nonelective treated as a PS or a QNEC for purposes of 401(a)(4)? Help!

[Tom Poje]

interesting.

notice 98-52 VIII D clearly states that safe harbors may NOT be used as QMACs or QNECs. (That is why I call them SHNECs)

the example given is a 7% SHNEC.

3% must be used to satisfy ADP test.

the remaining 4% could be treated as a QNEC in the ACP test.

remember, the SHNEC satisfies ADP, there is nothing in the regs that says a SHNEC is used to satisfy ACP.

notice 2000-3 Q-10

simply says if you apply section 410(B) separately to that portion of the plan that benefits only employees who satisfy age /svc lower than the minimum permitted under 410(a), the plan is treated as separate plans for section 401(k) AND the ADP safe harbor need not be satisfied with respect to both plans...Accordingly, the plan is not required to provide SHMACs or SHNECs to those participants who have not attained age 21/1 year of service.

based on that, it does not look like you have to provide the SHNEC to the less than 1 year group.

In other words, you have '2' plans. Those with more than 1 year you are providing the SHNEC. those with less than one year you are not. the profit sharing eligibility only refers to the profit sharing piece.

At least, I can see reading it that way.

note, you HAVE to test coverage separately seperately as well. That shouldn't be a problem, but one never knows. Recall that under the regs, all HCEs can be treated as having met the 1 year wait, even if they haven't. but that only applies to the ADP test, and not coverage. the regs are strange!

Also, in the case of QNECs the plan has to satisfy 401(a)(4) when QNECs are combined with nonelectives, but also has to pass when QNECs are not combined. My logic says SHNECs should be treated the same way, though I must admit I don't know for sure on that.