Semi-annual entry allows exclusion of 1 year employee?

[Guest Commuter Rex]

Client wants to set up new 401k for company of he and wife, and now also a full-time employee. Client and wife want to set up plan now and max out salary deferrals and probably add match or PS into it for 2004. If employee has 1 year of service on Dec 1, 2004, but plan has semi-annual entry, can we exclude the employee from non-elective or matching contributions (participation) for this year since the employee will not be able to join plan until Jan 1 2005 entry date?

[No Name]

Don't know why not.

[Bird]

Sure. But the owner and wife need to meet eligibility and enter the plan themselves in 2004 under the 1 year requirement.

I may be reading too much into it, but I'm just a little concerned about your phrasing "...can we exclude the employee from non-elective or matching contributions..."; either the employee is in or not for all contributions, including 401(k) deferrals. That is, you're not "excluding" the employee from any contributions; s/he is simply not in the plan.

[JanetM]

Sure this employee is excudable for ADP and ACP and they come in in 2005. But guess what, you now have a top heavy plan in 2005 since only owners have account balance. Your owners will be limited in what they can defer in 2005.

Why not spend a few pennies to ensure the owners can contribute to max. Since your plan is top heavy and you will have to satify this contribution, why not make the 3% non elective contribution and save yourself the testing, cover the top heavy and make the client happy.

[WDIK]

either the employee is in or not for all contributions, including 401(k) deferrals.

I may have misunderstood your comment, but it is possible to have different eligibility requirements for different contribution types, deferrals, match and nonelective.

[Guest Commuter Rex]

Ok, the employee won't enter the plan at all until Jan 2005 when the semi-annual enrollment allows. If we set this up now as Safe Harbor plan, will that help with Top Heavy status and contribution levels next year?

[WDIK]

The safe harbor option is definitely one worth exploring to allow the owners to maximize their 401(k) deferrals. It can also "exempt" the plan from top-heavy status if only safe harbor contributions are made.

However, be sure and coordinate the overall goals of the client and the demographic makeup (including disparity in salaries/ages) with the plan design.

[Bird]

QUOTE (Bird @ Nov 5 2004, 01:23 PM)

either the employee is in or not for all contributions, including 401(k) deferrals. 

I may have misunderstood your comment, but it is possible to have different eligibility requirements for different contribution types, deferrals, match and nonelective.

Right, and I was a little concerned about giving the wrong impression without a longer explanation. I didn't see anything about split eligibility in the question so didn't go there. (And of course it would be a BAD idea, as I read the goals here, as immediate inclusion for deferrals would trigger a top-heavy minimum).

Safe harbor is probably the way to go.