"partial" safe harbor 401(k) plan?

[EGB]

401(k) plan - implements 3% non-elective safe harbor plan - however, they do not make the 3% to all eligible employees - only to those who have a year of service.

The prototype sponsor/adminstrator (one that we all know) has taken the position that, because the safe harbor rules are not being met, they have to do testing, but they are only testing the group that should have been included under the safe harbor rules that have been excluded (ie, they are only testing the employees who are eligible employees, but do not have a year of service as these are the ones that are not receiving the 3% contribution that, under the safe harbor rules, should be receiving the contribution).

Is there authority for this? I would have thought that, by excluding the eligible employees with less than a year of service, the safe harbor rules were totally blown, and that 401(k) and 401(m) testing would have to be done as if there were no safe harbor plan. ??? In advance, thanks for any responses.

[QDROphile]

You effectively have two plans, a safe habor plan for those that meet the age and service requirements and one that does not. The one that does not gets tested. This is expressly covered by IRS guidance.

[EGB]

Thanks QDROphile.

More facts: Our plan has no service requirement for participation (ie, immediate participation for all employees), except they require a year of service for the 3% non-elective contribution. They have dual entry dates.

Testing only the group of employees who are not eligible for safe harbor has proven to be a formality. Since a highly compensated employee is determined by prior-year look-back earnings, the group they are testing has no highly compensated employees. This is because the only employees who fall into that group would be employees who were hired in the year that is being tested. Any employees hired in the prior year would be eligible for safe harbor during the test year and not included in the test group. Is this appropriate under the rules allowing this to be tested as two separate plans?

[Tom Poje]

yes, in effect you have one 'plan' that passes testing because it is safe harbor, and another plan that passes because there are no HCEs. (watch out for new owners, children, etc)

be careful! your annual safe harbor notification should indicate that only ees who have complete a year of service (for eligibility) are eligible for the safe harbor.