Is This Still A Safe Harbor

[Guest merlin]

A brain cramp. A design-based safe harbor db plan requires 1000 hours for accrual. The plan covers 1 HCE and 2 NHCE.One of the NHCE goes on a reduced schedule and only works 698 hours. She needs to get an accrual for 410b. As long as she gets the regular formula accrual, or t/h min if greater, the safe harbor is still maintained, right?

[Blinky the 3-eyed Fish]

I guess you could ask yourself how could it possibly no longer be a safe harbor based on the circumstances you describe. Then answer yourself that it couldn't and of course it's still a feel-good safe harbor happy plan.

[Guest merlin]

As I said, it was a brain cramp.

[Tom Poje]

back up one sec.

for a top heavy plan to be considered safe harbor, you must pass 410(b) treating those ees who receive top heavy as not benefiting [this is solely for safe harbor, not for coverage, see 1.401(a)(4)-2(b)(4)(vi)(D)(3) - the DB rules reference this section]

what you have if some ees receive a top heavy is a plan with two classes - those through the formula(same benefit for all ees) and those with top heavy only. thus, a plan that would have to be tested for non discrim. now, if you pass 410(b) by treating the top heavy people as not benefiting, that implies at least 70% of the NHCEs have the same benefit as the HCEs, so by 'default' the plan would pass nondiscrim rate group testing anyway [or at least looking at it in a rather simple way, that should be true] so I guess the govt lets you off the hook because testing becomes a foregone conclusion.

In the case of a DB, not even sure how an ee with less than 1000 hours would get a top heavy.

[AndyH]

Interesting point. Let's also remember that 50% R/P does necessitate a coverage failure. The NCT is passed, so the ABPT is available. And then you throw in everything but the kitchen sink. Granted, passing is unlikely unless there is another plan such a K plan, but the ABPT gets left out of too many discussions.

[Blinky the 3-eyed Fish]

Merlin qualified his question with "the regular formula accrual, or t/h min if greater", so there would be no need to treat the person receiving a TH minimum as not benefiting in this case to preserve the safe harbor status since the Merlin stated the greater of the two would be given.

Tom, sometimes docs have less than statutory requirements for TH. It's not too often, but I have seen it especially when the regular formula has an accrual requirement of lower than 1,000 hours.

Andy, good point, but since Merlin didn't mention a 401(k) plan it wouldn't pass ABT without a very strange formula benefiting the other NHCE at a greater level. Also, in these types of docs often is the case where there is ratio test fail-safe language that prevents ever getting to the ABT.

[Tom Poje]

Andy:

you get into some interesting possibilities when it involves a DB plan.

as to your comment, 'the NCT is passed', well, maybe. Recall, with DB you have to pass normal accrual and most valuable accrual. It is entirely possible that you could fail the most valuable test.

.........

For some clarification. the rule with safe harbor and ignoring 'top heavy only' people would apply if the top heavy was the only benefit a ee was eligible for.

In the example given, 1 nhce had 698 hours and didn't receive a benefit.

therefore for coverage you had 1/2 NHCE benefiting, or plan failure.

As Blinky indicated, the plan could have a lesser hours requirement for top heavy. If true, then the ee should have received a top heavy to start with, and therefore both NHCEs would benefit, so coverage would be at 100%. However, at that point, since the only benefit the ee was eligible for was top heavy, you would now have to run nondiscrim as you would probably fail coverage treating the ee as not benefiting.

In the particular example cited, it was indicated ee would eventually receive the greater of the formula or the top heavy minimum. Since it was indicated that ee received nothing to start with, I concluded the hours to receive top heavy was 1000 and so I didn't see how the ee get a top heavy. Oddly enough it would appear the ee could receive the benefit through the formula (via corrective amendment or safe harbor language) rather than top heavy. At this point, both NHCEs benefit, and since it doesn't involve an ee who received top heavy only, then the plan would be considered safe harbor. Or at least that is how I would understand things.

[AndyH]

Tom, the MVAR isn't normally part of the NCT or the Average Benefits Percentage Test. It only applies if there is a heavy Early Retirement Subsidy (reduction less than 4% on average if memory works today). Otherwise, it only applies for a(4) testing.