Early Eligibility for Safe Harbor Testing

[smm]

An employer wants to adopt a safe harbor 401(k) plan with a 3% SHNEC - (no match). Employer wants eligibility requirements to be age 20/1 month of service for deferrals and age 20/6 months of service for the 3%SHNEC. Is it possible to do this? There would not be any service or end of year requirement, of course.

200-3 and 98-52 point out that you can treat the plan as 2 plans and give the SHNEC to the group that meets the 1/yr/age 21 requirement, and test the other using ADP, but how does this work when you use 6/mo/age 20 instead.

Also, assuming that you can do it, if the group of new participants consists exclusively of NCEs, do you automatically pass ADP.

Thank you!!!

[Mike Preston]

I believe it works just the way you described it. Those who do not satisfy 21/1 get an auto pass, as do those who do.

[g8r]

I think you'd be a safe harbor plan for those with 20/6 and would not be a safe harbor for those with less than 20/6.

If those with less than 20/6 are all NHCEs, you pass. One other point. Watch out if you're trying to use the top-heavy exemption (for plans consisting solely of deferrals and safe harbor contributions). Since those with less than 20/6 aren't getting a safe harbor contribution, some people interpret the rules to mean that you are no longer exempt from the top-heavy rules. Absent definitive guidance from the IRS on this issue, I'd have to agree with that interpretation.

[Archimage]

I agree with g8er. If your plan is or is going to be top heavy then you probably want to reconsider your plan design.