Leased Employees Excluded from Safe Harbor 401(k) Plan?

[Guest SCUDDESLER]

My client sponsors a safe harbor 401(k) plan. It also employs three individuals as "leased employees" (i.e., my client is the recipient organization, not the leasing organization). The plan excludes leased employees from participation as an excludible group, just like it does union employees, for example. The plan's attorney argues that the leased employees cannot be excluded from participation and, as a result, must be permitted to (1) make cash or deferred elections and (2) receive the safe harbor contribution (which is 3% of pay). We cannot locate nor can the client's attorney cite any statutory or regulatory guidance on this issue. Our question, is whether the plan can exclude the leased employees (minimum coverage is not a problem)? Thanks in advance for your thoughts.

[mbozek]

See IRS notice 84-11 Q-14, 15. Leased employess can be excluded as a class.

[Guest SCUDDESLER]

Thanks for your response. The attorney is bound to say that the guidance you cite pre-dates the 401(k) safe harbor provisions which have changed the exclusion rules (although I appreciate your citation and believe it is on point). One of the issues the attorney has raised in support of her position is that a safe harbor 401(k) plan cannot impose any allocation criteria (e.g., employment on the last day of the plan year or completion of 1,000 hours during the plan year) on participants. While I agree with her assertion that allocation criteria are prohibited, it seems that the issue of allocation criteria presumes that we are already talking about a participant (i.e., someone who has satisfied the plan's eligibility criteria). If the plan imposes eligibility criteria that keep someone from ever becoming a participant, we never get to the issue of allocation criteria. Stated differently, eligibility criteria (which, in my mind, determine who becomes a participant) seem different from allocation criteria (which determine whether a specific participant shares in a contribution allocation). Thanks for your response.

[mbozek]

If a SH plan can exclude union employees as a group then it can exclude leased employees as a group since the rules of 410b apply. There is no special eligibility requirement for a SH plan similar to a SEP that requires that all employees be covered, e.g., part timers, who would otherwise be excludible. Let her find a citation that says that the 410b rules do not apply to a SH plan.