Safe Harbor 401k plan with 3% SHNEC

[Guest terric]

I am working on a Safe Harbor 401(k) plan where the employer has elected to contribute the 3% SHNEC.

The plan allows entry into the plan on the first day of the month following the date of employment for the 401k deferral portion of the plan only. All of these people will receive the 3% SHNEC.

Forfeitures are reallocated in the plan. In order to be eligible to receive a profit sharing contribution or fofeiture reallocation, the person would have to have the standard eligibility of age 21, 1 year of service and employed on the last day of the plan year.

Do you have to run separate 410(b) tests - one for the 3% SHNEC and another based on the PS cont/FFT reallocation?

Thank you for any insight.

[Tom Poje]

a nonelective can take the form and shape of a SHNEC, QNEC, or I guess an ordinary 'NEC', so there is only one 410(b) test, and since a SHNEC is available I would hope you are at 100%.

Conceivably you could fail nondiscrimination testing since some ees might receive 3% only and others would receive more than 3%, but unless you have a lot of HCEs in that group I wouldn't expect passing the test to be a problem

[Guest Pensions in Paradise]

terric - why are they giving the 3% SHNEC to the otherwise excludable participants (i.e. employees with less than 1 year of service and under age 21)? The plan could provide that only those participants who have met the 1 year/age 21 requirement would receive the 3% SHNEC.

[austin3515]

Pension in Paradies asks a great question. But assuming that's what they want to do, you also need to watch out for 401(a)(4), as Tom mentions. The way to do that is to make sure you pass the rate group test for the nonelective contributions. The way you test rate groups is to make sure that each satisfies "coverage." Remember, this is not the coverage test. Rate group testing uses coverage principles. First you'll want to disaggregate the plan into otherwise excludables and statutory employees. The Plan covering the otherwise excludibles should pass coverage and nondiscrimination by default because absent any new hire owners there won't be any HCE's. For the statutory participants, you'll want to run rate group testing. There are two rate groups, one is all statutory employee because they all got the SHNEC, so the coverage percentage is 100%, and the rate group passes. The second rate group includes only those employees receiving an allocation of forfeitures. The coverage test is performed as though the only people benefitting are those that got the forfeitures. If all you got was 3 % your not benefitting under the higher rate group. And so, if the resultant coverage percentage is at least 70%, you pass 401(a)(4). I won't get into using the Avg. Benefits Test to pass if this doesn't work out.

I think it's a common misconception, so I'll point out that for purposes of Schedule T and coverage testing, all nonexcludables are benefitting under this Plan so coverage is automatically satisfied. When performing the ratio percentage test in this type of plan, your performing nondiscrimination testing.

[Guest terric]

Pensions in Paradise...they wanted everyone to be able to defer as soon as they were hired, so they have to give the 3% SH to everyone eligible to defer.

Why would you have to perform the rate group testing if the profit sharing contribution is a straight pro-rata formula? I have only done a couple of these so I appreciate your help!

[austin3515]

You don't need to give everyone the 3%. See my post above!!

[austin3515]

LEarn something new every day... If you opt not to give the 3% SHNEC to all NHCE's, you've blown your top-heavy exemption. This might actually be a good thing, because although you need to use full year comp (instead of comp while a participant), at least you can use a vesting schedule...