Changing Eligibility in a SH 401(k) Plan

[Blinky the 3-eyed Fish]

SH 401(k) plan has 3 month eligibility and SH is given to all who are eligible. The plan sponsor wants to change eligibility to 1 year and do it mid-year. This would prevent some recent hires from entering the plan in the next few months of 2006 and push them back to 2007. Is this permissible?

I tried some research and couldn't find anything definitively prohibiting it, but yet I remain unconvinced that is correct.

[Belgarath]

I see no problem with it. I think there's indirect support under 1.411(d)-4 Q&A-1(d)(8), which lists some items that are not protected benefits. Included in this as an exception, and therefore an example of something which IS a protected benefit ...(the conditions for receiving an allocation of contributions or forfeitures for a plan year after such conditions have been satisfied)... my emphasis. Since the conditions for eligibility have not yet been satisfied, I see no protected benefit issues, and like you, I find nothing in the safe harbor guidance that would indicate otherwise.

[Leopurrd]

I agree with Belgarath on the fact that eligibility is not a protected benefit. Sal discusses this in his outline book, if you're looking for more info.

I'm not sure how this affects a safe harbor plan, though - Was the notice was distributed with eligibility requirements? If so, you can choose to grandfather the old participants in..you may want to take this into consideration when drafting the amendment.

Vicki

[Kevin C]

This question came up in the middle of a thread a couple of months ago with mixed opinions.

Prior Thread

I think it depends on how you interpret Reg 1.401(k)-3(e)(1). I read it as saying you can't amend the safe harbor provisions during the year. Others apparently read it as saying you can't make ANY amendments to a SH plan during the year.

The preamble to the regulations refers to this section with this paragraph:

These final regulations specify that a section 401(k) safe harbor plan must generally be adopted before the beginning of the plan year and be maintained throughout a full 12-month plan year. This requirement is consistent with the notion that the statute specifies a certain contribution level for NHCEs in order to be deemed to pass the nondiscrimination requirements. If the contribution level is not maintained for a full 12-month year, the employer contributions made on behalf of NHCEs should not support what could be a full year's contribution by the HCEs.

My 2 cents worth is that participation requirements are not part of the safe harbor provisions, so you can amend them. Tom Poje is going to get this question added to the IRS Q&A's at the ASPPA fall conference. Hopefully, we will find out more then.

[austin3515]

Excerpt from sited reg:

unless plan provisions THAT SATISFY THE RULES OF THIS SECTION are adopted before the first day of the plan year and remain in effect for an entire 12-month plan year.

I submit that hardship distributions can be eliminated as they are not required to satisfy this section. So too can eligibility be changed, as there are no special time of participation requirements for a 401(k) Plan. I don't think this statement means that you can;t amend your plan all year - you just can't amend it to add a 1,000 hour condition on the safe harbor, or add a vesting schedule to it, etc.