Safe Harbor Contribution to Selective HCEs

[Guest mcw]

I have a client that has a safe harbor 401(k). The are making the 3% nonelective contribution to NHCEs. Their intent is to not make this contribution to any of the owners of the company. However, they have 3 employees that are HCE and not owners. They would like to make the safe harbor contribution to NHCEs and these 3 HCEs. Can they do this? If so, do you have any authority? By the way, this is for 2007.

[Guest Sieve]

As long as the plan is properly drafted, this is ok. Only NHCEs must receive the safe habor contribution.

[ERISAnut]

I agree with Sieve and will elaborate on his last statement, then the first.

In order for safe harbor to exist, you are only required to provide it to NHCEs. Providing it to any or all HCEs is optional, but must be correctly reflected in the plan.

This is an exact repetition, but worded differently.

[Kevin C]

If this is for 2007, you have to follow the terms of the document. It is too late to change anything for a 2007 calendar year.

The safe harbor provisions have to be in the document by the beginning of the plan year and they may not be changed during the year. [1.401(k)-3(e)] The only exception would be if you did a conditional 3% SH notice. If your document had the safe harbor provisions at the beginning of 2008, it is too late to make any changes for 2008.

[buckaroo]

I was under the impression that most pre-approved documents only allowed for either a SHNEC to all or a SH NEC to NHCs only. That being said, I would have the PS allocation written as a tiered allocation with groups being something like OWNERS, OTHER HCES, and ALL OTHERS. I would then allocate the 3% SNHEC to only the NHCEs and make a 3% NEC to the HCEs. This way, if the company has a cash flow problem, then they would not be required to make the SHNEC to the other HCEs. Additionally, they can have the NEC subject to a vesting schedule.

Additionally, if they have a fantastic year, they can provide a 9% NEC to the owners with no additional cost (subject to passage of the required tests).

Just a thought...

[Kevin C]

Buckaroo,

The preapproved documents I've seen allow the SH contribution to go to 1) all participants, 2) all NHCE's, or 3) all participants who are either NHCE or Non-Key. The third option should work going forward.

But, the original post said this was for 2007.

[buckaroo]

I agree with both items. Yes, since it is for 2007, the client is stuck. I was thinking for future years.

As for the three options, I had not seen the third option in the very few pre-approved documents that I had seen. The third option would certainly work. However, my option is more cost effective for the client as it would not be required to go to any HCEs. Also, with the NEC, it allows for allocation conditions and vesting. The main hurdle you would have would be employee realtions and if you wanted to guarentee the SHNEC to the non-owner HCEs.

Just providing another alternative.