Safe Harbor and Otherwise Excludable Testing

[Guest kish]

I have a safe harbor plan that provides for the basic safe harbor match. There is immediate eligibility in order to defer into the plan, but there is a 1 YOS eligibility requirement for the match. Accordingly, the plan needs to satisfy ADP testing for the group of employees that did not complete 1 YOS.

The match is made on a payroll basis and is not trued up at the end of the year. Employees begin to receive the SH match on the payroll period following completion of the 1 YOS.

My question revolves around how you complete the testing for the otherwise excludable group. In a non safe harbor plan, I would make the determination of the two groups of employees and once that was done, I would test all contributions and compensation of each of those employees only in the group they were determined to be a part of. Would this same approach be the way you test in a safe harbor plan?

For example: A calendar year 2004 test is being performed. There are some employees hired early in 2003, one of which is an HCE for 2004. Based on the statutory requirements, all of these employees would be considered statutory employees for 2004 testing. However, they would not have begun to receive the SH match until part way through 2004. Therefore, do their contributions made during the first portion of the year need to be tested with the otherwise excludable population? If not, does that jeopardize the SH status of the statutory portion of the plan because some HCEs may end up with a higher rate of match as compared to NHCEs that may have only started receiving the match mid year?

Anybody have any guidance?

[Tom Poje]

the approach should be the same for safe harbor plans. obviously the regs already anticipate this scenario because they say you only have to provide the safe harbor for statutory includables. you do lose the free ride on top heavy, but other than that treat the plan as you would any other.

In other words, separate plan into the two groups, otherwise excludables and statutory includables.

now, did all the statutory includables receive a safe harbor? the answer would be yes. rate of match doesn't come into play, for you would only look at comp from date of entry.