End-of-Year requirement for 401k?

[Guest rickw]

Is it possible to impose a 1,000-hour or end-of-year requirement to remain as a participate in a nonelective Safe Harbor 401k?

[g8r]

The short answer is no - you can't do that. The problem is that at the beginning of the year, how do you know whether or not the person can defer? If you let the person defer and then find out the person doesn't complete 1,000 hours or end of the year, then you haven't followed the terms of the plan. You would have an operational violation. Under EPCRS self-correction you have to have procedures in place to prevent the error from happening again. Not sure how you would do that. That's why no plan imposes any conditions (other than initial eligibility conditions) on someone deferring. And, once you defer, you can't impose end of the year/1000 hours on the employer non-elective safe harbor contribution.

[Blinky the 3-eyed Fish]

A plan cannot have any requirements to be able to defer or receive a safe harbor contribution once entering the plan, PERIOD. You also cannot have a break-in-service requirement greater than 500 hours. It has nothing to do with having a potential operating violation.

[Guest rickw]

So, what happens if a participant terminates with under 500 hours? Do their deferrals for the year get returned to them, and do they NOT get a safe-harbor employer contribution?

[g8r]

There are two issues here that seem to be making this confusing. It has to do with conditions you can impose on (1) deferrals and (2) safe harbor nonelective contributions.

It's clear that for the safe harbor nonelective contribution, it goes to everyone who is eligible to defer. You can't impose any conditions on receiving that contribution.

What you're really asking is whether you can impose conditions on deferring, thereby eliminating the need to make the nonelective safe harbor contribution (because the person isn't eligible to defer).

I don't know of a specific cite in the regulations addressing this, but what I was trying to point out that even without a specific cite, you can't impose ANY conditions on deferring because it just doesn't work.

For example, your last question about what happens if somone terminates with less than 500 hours. If you COULD impose conditions on deferring (e.g., you must have more than 500 hours in year of termination to defer) then I don't know what the answer to your question would be. In other words, what do you do with the deferrals if somone deferred but then quit with less than 500 hours. The first time that happens you might be able to use self-correction and refund the deferrals. But, one of the principles of self-correction is to have procedures in place to prevent it from happening again. There's absolutely no way to prevent it from happening again -- other than by making sure the plan does not impose any conditions on deferring.

[Alf]

No. No 1,000 hour of service or last day of year requirment can be imposed on receipt of nonelective contributions in a nonelective contribution safe harbor plan.

Elective deferrals aren't really an issue for the nonelective safe harbor contribution rules. Section V. B. 1. c. ii. of IRS Notice 98-53 allows restrictions on the amount NHCEs can defer so long as each eligible employee is permitted to make elective contributions in an amount that is at least sufficient to receive the maximum amount of matching contributions available under the plan.

However, section V. B. 2. of IRS Notice 98-52 requires that a safe harbor nonelective contribution must be made on behalf of each eligible employee. Section IV. A. specifies that the regulatory definition of eligible employee in IRS reg section 1.401(k)-1(g)(4) applies which means that each employee who has met the minimum age and service requirements of the plan must receive the nonelective safe harbor requirement.

[Guest rickw]

I thought the 500 hour/terminated rule trumps almost everything else. Such participants aren't counted as "non-excludibles", etc.

Mechanically, I presumed that IF the plan was required to return the deferrals, that would be similar to the old days when excess deferrals were returned when a plan failed ADP/ACP testing. Was that unique because that only involved refunds to HCEs maybe?

[g8r]

The refund for a failed adp/acp test is statutory and thus a refund of deferrals is permissible.

You're correct that someone who terminates with less than 500 hours is excludible for coverage testing. But, a plan is not required to preclude those who terminate with less than 500 hours from benefiting -- it's a permissible provision. Thus, if you include such a provision but you let someone benefit in error (i.e., you let the person defer), there is no authority the statute or regulations to allow a refund of deferrals. What would have is a failure to follow the terms of the plan - not a failure of a statutorily imposed adp/acp test. So you're option is to prohibit any deferrals until 500 hours are completed or don't impose any conditions on deferring and let them defer right away. And, without spending hours on this, suffice it to say that not letting someone defer until 500 hours are completed won't work. There you do have potential qualification problems by precluding any deferrals for the first quarter of every plan year.

[Blinky the 3-eyed Fish]

Confusion is reigning here.

The rule that you can consider excludable in performing coverage testing those participants that terminate with less than 500 hours is only available if there is a condition on receiving the allocation, like a last day and/or hours requirement. I am not where I can give a cite, but you CANNOT, repeat CANNOT, have an hours and/or service requirement on making deferrals OR receiving a safe harbor contribution, either nonelective or match. There IS a specific cite and I will find it on Monday regarding the deferrals unless someone can beat me to it. Alf already gave a cite for the safe harbor rules.

Thus, when doing a 410(b) test on the deferral portion of the plan, you CANNOT exclude participants who terminated with less than 500 hours.

[g8r]

Blinky - I don't there is disagreement regarding the nonelective safe harbor or basic or enhanced match used to satisfy the ADP test. Those contributions must generally be made to all who are eligible to defer.

But, I think the original question (which I could have misinterpreted) is whether you can impose conditions on someone deferring. The thought being that if they can't defer, then they aren't entitled to the safe harbor contribution. So the question is... where does it state that you can't impose end of the year/1000 hours on deferring? All I was trying to point out in my prior comments is that I don't need a specific cite to prohibit this because as a practical matter, it just can't be done.

[Tom Poje]

one place I think it is inherent is in 1.401(k)-1(a)(2)(iii)

...Similarily an amount is not currently available as of a date if the employee may under NO CIRCUMSTANCES receive the amount before a particular time in the future...

but also, what is the only way one can get $ out of a 401(k)?

death, disability, termination, etc.

there is nothing under those conditions which says, 'or current year deferrals if ee did not work x hours'

[John A]

What if the requirement applies to the following year? In other words, what if the requirement is that a participant has a last day, 1,000 hour requirement to determine if the participant can or cannot defer for the following plan year?

[Blinky the 3-eyed Fish]

Wouldn't that be akin to having a break in service of more than the allowable 500 hours?

[Guest Pensions in Paradise]

401(k)(2)(D) provides that a qualified cash or deferred arrangement cannot require, as a condition of participation in the arrangement, that an employee complete a period of service with the employer (or employers) maintaining the plan extending beyond the period permitted under section 410(a)(1) (determined without regard to subparagraph (B)(i) thereof).

[John A]

The 410(a)(1) requirement also applies for purposes of participating in the profit sharing and matching contribution components of a plan, but it is clearly acceptable to have a 1,000 hours and last day requirement for a participant to actually receive a matching or profit sharing contribution. So I do not think 410(a)(1) prevents a plan from having a 1,000 hours or last day requirement to actually be able to receive the benefit of being able to defer. Is there something else that does?

There are restrictions that are allowed on deferrals - for example, clearly a plan can provide that a participant may only change a deferral election on a quarterly basis. Why couldn't a plan provide that participants in the 401(k) component could not start making deferrals to the plan until they had reached 1,000 hours for the plan year, at which point they would be allowed to defer for the rest of the plan year? How is this different than requiring 1,000 hours for match?

[E as in ERISA]

The 401(k)(2)(D) requirement itself does NOT apply to the profit sharing or matching portion. It is only incorporating by reference part of the timing rule of 410(a) for limited purposes.

Note that 410(a) is the minimum participation requirements, which only applies to DB plans now -- it does not apply directly to profit sharing or matching contributions! The same timing rules just end up being applied to them because they are picked up in the minimum coverage rules.

[Blinky the 3-eyed Fish]

Okay, here is my understanding with help from the ERISA Outline Book.

First, 401(k)(2)(D) and 410(a) is referencing initial participation in the plan, not the accrual requirements once a participant in the plan.

Second, it's not 410(a) that applies to DB plans only, but rather 411(b), which are the requirements allowable to get accruals. See page 3.76 of the 2003 ERISA Outline Book. DC plans are not addressed in 411(b) but rather in DOL Regs as to reasonable allocation conditions.

Supposedly no requirement to be able to condition deferrals is considered reasonable? See page 3.90. Sal doesn't give cites at all, but does state that "Additional accrual requirements USUALLY (emphasis mine) will not apply to a participant's right to make elective deferrals under a 401(k) plan".

So, in a reversal of my earlier thoughts, it may be possible to have allocation conditions on deferrals? I have never seen it done, nor is that an option in any VS document I have prepared, but I suppose it's possible. This would definitely need a determination letter before I would attempt such an idea. Actually, I wouldn't attempt it at all personally.

[R. Butler]

Why couldn't a plan provide that participants in the 401(k) component could not start making deferrals to the plan until they had reached 1,000 hours for the plan year, at which point they would be allowed to defer for the rest of the plan year? How is this different than requiring 1,000 hours for match?

The hour restriction on deferrals is clearly different than an hours restriction on a match. If a participant works 1,000 hours he has lost nothing due to the hours requirement on the match. He will receive a full match under the formula. If a partcipant is required to work 1,000 hours before deferring, unless he's making pretty good money, he can't make up the lost opportunity to defer.

Also, if you impose the requirement, then the participant should have been eligible as of the first day of the plan year. Lets say participant meets the requirement in June. The employer didn't let an elgibile employee defer for 5 or 6 months out of the year. It seems to me that the employer has to make up the lost deferrals.

[John A]

What if the decision is made based on whether or not a participants is scheduled to work 1,000 hours for a plan year? All participants scheduled to work 1,000 hours are allowed to defer from the beginning of the plan year - all those scheduled to work less than 1,000 hours are not allowed to defer at all for the year. Thoughts?

I personally would prefer not to do this at all, but I have not been able to find arguments that are strong enough to prevent a determined plan sponsor from going ahead with this idea. Help?

[Tom Poje]

ok, how about the difference between 1.401(k)-1(g)(4) and 1.401(m)-1(f)(4)

both say "By contrast, if an employee must perform additional service (e.g. satisfy a minimum period of service) in order to be eligible...the employee is not an eligible employee.

however, 1.401(k) adds 'see paragraph (e)(5) for certain limits on the use of minimum service'

and 1.401(k)-1(e)(5) says 'only if no employee is required to complete a period of service greater than one year (determined without regard to section 410(a)(1)(B)(i)) with an employee maintaining the plan to be eligible to make an election under the arrangement.'

I suppose you might try to argue applying this on a year to year basis - I don't read it that way. Certainly there is no 'last day' provision in this section, and again, no such similar cite exists for match about imposing additional limits, plus I have never seen a document that gives you a choice of requiring an additional service requirement in a given year. The ERISA Outline Book (3.90 of the 2003 edition certainly seems to believe you can't have an hours or last day condition, the only possible confusion being its statement "Additional accrual requirements USUALLY will not apply to the participant's right to make elective deferrals.."

It provides 2 examples. But then note it adds an exception that if the ee had a break in service this could result in suspended participation.

i would add a condition such as switching from nonunion to union as another change that might make someone ineligible.