Cross-Tested Safe harbor 401(k) with 2 year profit sharing wait

[Guest Tbrown]

I think this sort of ties into a couple of other threads here, but I wanted to throw this out. Here is the situation:

A safe-harbor 401(k) plan (3% non-elective) which has a 2 year wait to receive a profit sharing contribution. The way the groups are set up, we can maximize the owner group by giving a 5% contribution to the rest of the employees. The original thought was to just give the 3% to the employees who had not met the 2 year profit sharing requirement. However, after doing more reading (and what fun and exciting reading it was), I cannot find anything that would allow us to to do that. It appears that we have to give all NHCE's a 5% contribution, including those that have not met the 2 year requirement.

In this scenario, the 2 year wait really doesn't benefit them at all. In fact, it requires them to fully vest the entire contribution rather than being able to set the additional 2% above the safe harbor to a vesting schedule.

Do you agree? Just wanted to get other thoughts on this. Thanks in advance.

[Mike Preston]

If I understand your question, you are inquiring about a plan year that begins in 2002 and you are talking about the gateway necessary to use the cross-testing rules. Right?

Assuming so, then you can provide the 5% only to those that satisfy the 1 year age and service requirements. Those who don't meet the 1 year age and service requirements are allowed to be excluded from the gateway.

Does that help a bit?

[Guest Tbrown]

I probably didn't explain it very well. The plan allows for 401(k) after one year, but has a 2 year wait in order to enter for purposes of the profit sharing. The way I understand it, because it is a safe harbor with the 3% non-elective contribution, we must give the 3% to all of those that have met the 1 year for 401(k) contributions. And since they are getting a non-elective contribution, they must be raised to the 5% gateway even though they have not been there for 2 years (eligibility requirement for the profit sharing).

Does that explain it better?

[Mike Preston]

Much and I agree with you. Short of setting up two plans and then going through some carelully planned (i.e., administratively cumbersome) procedures for monitoring 410(B), I think you've got it.

[Belgarath]

I'm not sure I agree. 410(B)-7 provides for mandatory disaggregation, and I don't think there's any requirement for a gateway on the profit sharing portion, where the employees have not satisfied the eligibility and are not "benefitting" under that portion of the plan.

[Mike Preston]

But if they are getting a top-heavy 3% doesn't that count as benefitting?

[Belgarath]

No, the 3% is only in the 401(k) portion. The employer discretionary profit sharing portion of the plan is treated as a separate plan under the mandatory disaggregation provisions of 410(B)-7. At least that's how I read it. So anyone who receives no allocation, either regular or top heavy, in the profit sharing portion, doesn't have to receive the gateway. Now, if I'm reading the original post wrong, and the 3% is in the profit sharing portion of the plan, then yes, they would be benefitting and would have to receive gateway. But it doesn't appear to me that that's what is happening, because they aren't eligible in the profit sharing yet.

[Mike Preston]

I see your point. I don't have time to pull the regs this morning, but my gut feel is that if the safe-harbor is being used to satisfy the top-heavy requirement, then it is not solely being used to satisfy the ADP safe-harbor and will therefore cause the individual to be considered benefitting for purposes of the gateway. But, I like your interpretation better.

[Tom Poje]

http://aspa.org/archivepages/conferences/2...p/questions.htm

ok, maybe they aren't numbered but this is question 8

q. if you have a safe harbor 401(k) plan that has a last day requirement to receive the employer profit sharing contribution are you required to increase the 3% nonelective contribution to 5% for NHCEs who have terminated employment.

a. because they are entitled to a 3% nonelective contribution, such NHCEs must be increased to 5%.

so in this example, the ees who quit are no longer 'eligible' for the profit sharing. however they must be increased to 5%.

Q-10 of notice 2000-3 deals with the issue of eligibility conditions that are lower than the greatest permitted...the plan is treated as two separate plans for purposes of 401(k)...

since you can't have a two year wait for the 401(k) portion, your separate testing wouldn't occur in the example Mr. Brown gave.

[Guest lforesz]

Hi,

I'm not sure that I agree. In this example, the employees with less than 2 YOS do not benefit under the PS portion of the plan, so it would seem that they would not need not be bumped up to 5%. This is assuming the PSP only passed 410(B). Even though a bi-product of the safe harbor contribution is that the plan is deemed to satisfy top heavy, I don't think you would need to treat these employees as benefitting under the nonelective PS, bump them up to 5% and include in the cross-test until they have 2 YOS.

I read question 8 and I'm not exactly sure why the employees who are not there on the last day of the plan year need to be bumped up to 5%. I guess it is because the safe-harbor nonelective and regular PS are treated as one disaggregated portion and since a terminated employee benefits under the 3% nonelective (even though they don't benefit under the regular PS) there is no distrinction made and, thus, they are subject to the gateway.

I find this strange. I think the IRS should allow us to disaggregate the safe harbor from the nonelective if the requirements are different and only include the pure PS contribution in the cross-test (subject to passing 401(B)).

Any thoughts?