Exclusions in a Safe Harbor 401(k) Plan

[Guest facade]

Is it permissable for a SH 401(k) plan to exclude employees from participation by means other then age & service (I.E. employees in the mail room may not participate) and still meet all the allocation and elgibility requirements of the Safe Harbor regs? Such a plan would exclude employees who have satisified the maximum allowable age and service requirements but would pass the 70% coverage ratio test.

My thinking is once an employee has met the statuatory requirements for eligibility any plan imposed requirements are effectively allocation requirements. And as a Safe Harbor plan can not impose any allocation requirements on recieving the Safe Harbor contribution, seemingly excluding employees in this manner would preclude the plan from being a Safe Harbor 401(k).

Why am I wrong?

[ERISAnut]

You are wrong because 410(b) is a different standard than 401(k)(3) and 401(m)(2).

Stated in layman's terms, the coverage test is different from ADP and ACP tests.

All a safe harbor 401(k) does is deem the plan to pass the ADP test (and in many instances the ACP test). Whether your plan is safe harbor or not; you must pass coverage under 410(b).

410(b) doesn't look at who receives what; but instead looks at what percentage of HCE's are benefiting under the plan compared to the NHCE's that are benefiting under the plan.

You can exclude any class of people who want provided the ratios satisfy the coverage test.

[Guest facade]

You are wrong because 410(b) is a different standard than 401(k)(3) and 401(m)(2).

Stated in layman's terms, the coverage test is different from ADP and ACP tests.

All a safe harbor 401(k) does is deem the plan to pass the ADP test (and in many instances the ACP test). Whether your plan is safe harbor or not; you must pass coverage under 410(b).

410(b) doesn't look at who receives what; but instead looks at what percentage of HCE's are benefiting under the plan compared to the NHCE's that are benefiting under the plan.

You can exclude any class of people who want provided the ratios satisfy the coverage test.

Thank you for the reply.

The 410(b) coverage test is not central to my question. The assumption is the plan will pass coverage testing.

The main issue is can you ignore employees who are not excludable by statute but are excluded soley by a non age or service related plan exclusion when determing that a plan has met the eligibilty and allocation requirements to be a Safe Harbor plan.

Such employees are considered eligible employees who receive no benefit in the plan when you perform a general test. They are not simply ignored. It would seem logical that such treatment would persist in determing whether or not the plan is eligible to apply a Safe Harbor with respect to ADP & ACP testing.

The regulations state for 401(k) purposes an employee who has executed a one-time irrevocable waiver is not treated as a eligible employee. I have found no documentation to support similar treatment of employees who are involuntarily excluded by a plan provision.

[Tom Poje]

check the definition of 'eligible employee' 1.401(k)-6 "an employee directly or indirectly eligible to make a cash or deferred election under the plan..."

if they are excluded from the plan, then they would not come into the ADP test at all.

[Guest facade]

check the definition of 'eligible employee' 1.401(k)-6 "an employee directly or indirectly eligible to make a cash or deferred election under the plan..."

if they are excluded from the plan, then they would not come into the ADP test at all.

The next paragraph (below) goes on to discuss the effects of various eligibilty requirements. All the examples, other then failure to satisfy age/service and the one time waivor, state that an employee who either does not or is prevented from deferring is still considered an eligible employee.

(2) Conditions on eligibility. An employee who is unable to make a cash or deferred election because the employee has not contributed to another plan is also an eligible employee. By contrast, if an employee must perform additional service (e.g., satisfy a minimum period of service requirement) in order to be eligible to make a cash or deferred election for a plan year, the employee is not an eligible employee for the plan year unless the service is actually performed. See §1.401(k)-1(e)(5), however, for certain limits on the use of minimum service requirements. An employee who would be eligible to make elective contributions but for a suspension due to a distribution, a loan, or an election not to participate in the plan, is treated as an eligible employee for purposes of section 401(k)(3) for a plan year even though the employee may not make a cash or deferred election by reason of the suspension. Finally, an employee does not fail to be treated as an eligible employee merely because the employee may receive no additional annual additions because of section 415©(1).

[austin3515]

Do you have access to the ERISA Outline Book? Sometimes the regulations are written in giberrish, so while it may seem like their saying one thing, they're really saying something unrelated. I think that's what's happening here. The EOB explains everything quite well, and I'm sure you'll find a section that talks about the fact that a safe harbor plan may exclude any class of employees it wants to, provided coverage is passed.

[ERISAnut]

Facade,

You are making it too difficult on yourself when you try to read the technical language inside the code and the regs. If a plan excludes hourly employees from participation; even if those hourly employees would otherwise satisfy the age and service requirements for participation, then those employees are not included in the ADP/ACP tests since they are not "benefiting" from that arrangement.

However, those same employees are includable inside the coverage tests since they represent an exclusion that is not considered a "statutory exclusion". When trying to learn how to prove non-discrimination in a plan, it helps to understand how coverage testing and non-discrimination testing are different.

You cannot test a plan under ADP/ACP until the population being tested has passed coverage under 410(b). That means you must first ensure the exclusion of the employees other than those who fail the age and service requirements passes 410(b). Once you prove this, you then proceed to the ADP/ACP test while testing ONLY THOSE EMPLOYEES WHO ARE ELIGIBLE under the ADP and ACP plan. If you are excluding hourly employees, then they aren't eligible.

[Guest facade]

Do you have access to the ERISA Outline Book? Sometimes the regulations are written in giberrish, so while it may seem like their saying one thing, they're really saying something unrelated. I think that's what's happening here. The EOB explains everything quite well, and I'm sure you'll find a section that talks about the fact that a safe harbor plan may exclude any class of employees it wants to, provided coverage is passed.

The EOB is always my first stop. I was unable to find my answer there.

[Guest facade]

Facade,

You are making it too difficult on yourself when you try to read the technical language inside the code and the regs. If a plan excludes hourly employees from participation; even if those hourly employees would otherwise satisfy the age and service requirements for participation, then those employees are not included in the ADP/ACP tests since they are not "benefiting" from that arrangement.

However, those same employees are includable inside the coverage tests since they represent an exclusion that is not considered a "statutory exclusion". When trying to learn how to prove non-discrimination in a plan, it helps to understand how coverage testing and non-discrimination testing are different.

You cannot test a plan under ADP/ACP until the population being tested has passed coverage under 410(b). That means you must first ensure the exclusion of the employees other than those who fail the age and service requirements passes 410(b). Once you prove this, you then proceed to the ADP/ACP test while testing ONLY THOSE EMPLOYEES WHO ARE ELIGIBLE under the ADP and ACP plan. If you are excluding hourly employees, then they aren't eligible.

This is the general opinion of the people I work with as well. Run the 410(b) coverage first and then you can ignore the excluded employees from any further consideration.

My concern is the inconsistancy with this method. You are treating the excluded employees differently depending on what method of demonstrating the plans compliance that you are using.

In a generally tested plan you may exclude employees provided you pass 410(b) coverage testing. However when you perfrom your general testing to demonstrate the plan is non-discriminatory, those excluded employees must be included as elgibile but non-benefiting employees. This clearly has an impact on the plans ability to satisfy the testing.

In a plan that applies a Safe Harbor (such as the 401(k) SH or the uniform allocation safe harbor that exempts the plan from general testing) the plan may also exclude employees provided the plan passes 410(b) coverage testing. After that point the argument is that you may completely ignore those excluded employees when determing whether or not you are meeting the requirements to apply the Safe Harbor in the first place. In essense one is providing some employees with a 0% allocation rate but arguing that it is still uniform and therefore requires no general testing or in the case of a SH 401(k) you are are able to treat employees as excludable even though such exclusions are not supported in the statutes.

The plan that applies a Safe Harbor ignores its excluded employees completely while a plan that does not employ a Safe Harbor can not do so.

As this does not seem logical to me, I was hoping I could find some written guidance stating that this is in fact acceptable.

[ERISAnut]

When you say "general" testing, you are seeming to imply the general nondiscrimination under 401(a)(4). When you are running the average benefits test, you must include all non-excludable employees under all plans. Apples and Oranges. When you pass 410(b) using the coverage ratio test, there is no need for the "general test" that you are referring to.

One of the most difficult areas in the pension industry is semantics. Starting out, nothing is what it seems. You read one thing, and then read something stating the total opposite. The key is the learn the "phrases" that have particular meaning and use this knowledge to put things in the proper context.

[Kevin C]

When you pass 410(b) using the coverage ratio test, there is no need for the "general test" that you are referring to.

Sorry, but that is not right. You seem to be confusing 401(a)(4) general testing with average benefits testing. Passing the 410(b) ratio percentage test does not give you a free pass on 401(a)(4). If your DC allocation uses a safe harbor allocation method, then you do not have to do a 401(a)(4) general test. If it is not a safe harbor allocation method, 401(a)(4) general testing is required.

[ERISAnut]

Semantics on an otherwise simple issue.

Amazing.

The case being discussed here is an individual who has met the age and service requirements for participants in a 401(k) plan; but is excluded by class. This individual is not "benefiting" from the 401(k) arrangement since he is not "eligible" to defer. Hence, the plan does not afford the individual the right to defer since he is a member of a class. That, to me, is safe harbor. So any mention of the "general test" is confusing a simple issue.

[Guest facade]

When you pass 410(b) using the coverage ratio test, there is no need for the "general test" that you are referring to.

Sorry, but that is not right. You seem to be confusing 401(a)(4) general testing with average benefits testing. Passing the 410(b) ratio percentage test does not give you a free pass on 401(a)(4). If your DC allocation uses a safe harbor allocation method, then you do not have to do a 401(a)(4) general test. If it is not a safe harbor allocation method, 401(a)(4) general testing is required.

And this leads us back to the issue...

If I have a plan that states office workers get a 10% allocation and Janitorial staff get 0%. This would not meet the requirements to be a Safe Harbor allocation method and I would have to perform general testing to demonstrate compliance with 401(a)(4). Even if I met my 410(b) coverage requirements I would still be required to test the allocation. In essense a plan provision denies employees who can not be excluded by statute from recieving the contribution which in turn denies the plan the ability to rely on the Safe Harbor.

Now assume instead my plan simply states the Janitorial staff is not eligible to participate in the plan. The argument is as long as the plan passes 410(b) coverage the Janitorial staff is completely ignored and since all remaining employees (the office workers) recieve 10%, the plan may rely on the Safe Harbor and not generally test the plan. So in this case a plan provision denies employees who are not excludable by statute from sharing in the contribution yet the plan is still eligible to rely on the Safe Harbor.

From my perspective it seems logical that any plan provision that denies a non-excludable employee from sharing in the allocation should have same impact on the plans ability to show complaince with 401(a)(4) (or reliance on the the 401(k) Safe Habor). How can one provision that denies them a contribution result in general testing and another provision which has the exact same effect allow the plan to still use the Safe Harbor?

I realise we have gotten away from speaking strickly about 401(k)s.