Immediate eligibility ADP testing

[Sully]

I have a client with a non-top heavy 3% safe harbor 401(k) plan. The plan is run on a calendar year. Eligibility is one year of service and age 21 with dual entry. The employer wants to change the plan to allow immediate eligibility and participation on the 401(k) portion of the plan. There is an employee that was just hired and he will make more than $100,000 in calendar year 2006, therefore he will be an HCE for 2007. He will be the only HCE in this situation; all the other new 401(k) entrants will be NHCE’s. He will enter the profit sharing and safe harbor portions of the plan on 7/1/07.

The question I have is this: Do you have to run an ADP test for the first half of 2007 for the otherwise excludable employees? Or, since this employee will enter the safe harbor portion of the plan on 7/1/07 he will become an includable employee who is receiving the safe harbor contribution (for the latter half of the year) and therefore would not have to be tested with the other excludable employees for the year?

Thank you for any input.

[Dan]

Why would you run an ADP test on a plan that is safe harbor?

[WDIK]

It is not permissible to place different conditions on the safe harbor contributions than are required for deferrals. My impression from the original post was that the eligibility requirements were only being changed for the deferrals, so the plan would not be considered a safe harbor plan.

[Archimage]

The permissive disaggregated portion, otherwise excludable, would not be safe harbor but the rest of the plan would be.

[KateSmithPA]

How does this work in practical terms? Is it possible that the group of participants who defer but are not eligible for a Safe Harbor contribution could fail the ADP test?

[Archimage]

Not really anymore. You can now carve out the HCEs to put with the nonexcludable group so you basically would always pass ADP.

[Tom Poje]

If I understand the original question correctly:

ee enters plan immediately for deferrals (in 2006)

he is not eligible for the safe harbor until 7/1/2007, so he didn't get anything the first half of 2007.

therefore, do I have to run a test for the first half of 2007?

the answer is no, this ee is not treated as an 'otherwise excludable' employee for testing in 2007 even though he was otherwise excludable for a portion of the year.

good question!

in the same vein, if the plan was top heavy, but there were no other non elective contributions, you still get the free ride - even though the employee only received safe harbor for half a year.

[Sully]

What if this same highly compensated employee terminates employment before 7/1/07? Since he would be considered 'otherwise excludable' wouldn't you have to run the ADP test for 2007?

[Tom Poje]

yes that could happen if he failed to make the next entry date.

there is that option of treating 'all hces' as being includable.

It is possible you could exercise this - I don't think the IRS has considered this situation arising in a safe harbor plan where otherwise excludables are excluded from the safe harbor.

not sure if that is in the 'spirit of the reg' to get a free ride on the ADP test under those circumstances.

[Guest DAO]

My understanding per The ERISA Outline Book is that 401(K)(3)(F) does not apply to dissaggregation of otherwise excludable employees from a safe harbor 401(k) plan. See Q&A 10 of IRS Notice 2000-3.

I think ADP is required if there are HCEs.

[MWeddell]

I think the final 401(k) regulations changed the situation that DAO referred to. Under either method of disaggregation, the statutory rule that became effective in 1999 or the old coverage testing disaggregation rule, one can choose to test the HCEs that are in the otherwise excludable group with the >21 and >1 YOS group.

[Guest DAO]

Would this apply only to plan years beginning on or after Januaury 1, 2006 (for a plan that did not adopt the final regs earlier)? Would like to apply 401(k)(3)(F) in 2005 for a safe harbor 401(k) plan if possible.

[MWeddell]

DAO -- It sounds like you're out of luck. Before the 401(k) regulations became final (effective in 2005 or 2006 depending when plans complied with the final regulations), then using the old 410(b) regulations method of disaggregating the < 21 or < 1 YOS group required that the HCEs, if any, in that group were tested against the NHCEs in the otherwise excludable group.