Safe Harbor and Testing

[Guest Ashlea]

I am a little new to this and had a question in regard to Testing...

We have a Plan that was Safe Harbor in 2003, but due to financial difficulties changed the plan not to be Safe Harbor for 2004. All of the proper notification to participants etc. took place. My question concerns when is someone in this situation considered to be an HCE.

Employee's A & B only worked a couple of months in 2003, but worked a full year in 2004 and will be over the Salary limit for HCE. Are they considered HCE's in 2004?

Employee C was over the HCE Salary limit in 2003, but NOT in 2004. Are they considered HCE in 2004.

We used prior year testing - accordingly all HCE's cannot contribution over a predetermined percentage - as not to fail the tests. But I am unsure if the above employees are considered HCE for purposes of the 2004 tests. Thank you for any help!

Ashlea

[wmyer]

To determine HCE status, always use the compensation from the lookback year, not the current year. Based on what you write, A&B are not HCEs for 2004, but will be for 2005. C is an HCE for 2004, but not for 2005. Of course, if A, B, or C are owners or owners by attribution, the answer will change. Safe Harbor plans are deemed current year testers, so I assume you made a plan amendment to change to prior year testing.

[Guest Ashlea]

Thank you for your response, it is nice to be able to get confirmation!

No they are not owners nor related to the owners and the Adoption Agreement was amended and new SPD's given out. I think we have it covered, but I wasn't 100% sure about a the HCE status and in what given year - thanks again for your response!

[MWeddell]

Also, there are restrictions on your ability to change from current year method (which a safe harbor plan is deemed to be) to a prior year method, so check that the switch to prior year method was valid.

[Guest Ashlea]

I will double check that - thanks. Also, one more quick question - when determining the HCE deferrals, is it correct that they can only use $205,000 as their comp? For example there is an HCE that made $222,000 for the year and based on testing they cannot contribute over 4%..... $222,000 x 4% = $8,880 or can they only use $205,000 x 4% = $8,200?

[wmyer]

You are correct...ADP testing for 2004 cannot be based on compensation in excess of $205,000.