Can a Safe Harbor 401(k) plan exclude a class of employees

[katieinny]

An employer has an existing SH plan. The company will be hiring a new group of employees that will be in its own class, e.g., trainers. The company doesn't have any trainers now. The employer wants to exclude this classification of employees from the plan. Excluding the trainers won't cause the plan to fail coverage, but I'm wondering about the Safe Harbor aspect of the plan. I'm thinking that this group must get a Safe Harbor contribution once the age and service requirements are met, even though they might be excluded from getting any additional discretionary contribution. Am I right?

[Jim Chad]

I can't think of any "universal availability' kind of requirement for SH. You say it will pass coverage. I think you are good to go when you exclude them.

[Guest Sieve]

That's right. But, of course, it's all keyed into salary deferral eligibility: if an NHCE is eligible for the deferral, you then cannot exclude that eligible employee (other than for age or service) from the ADP SH contribution (whether it's a SH NEC or a SH match).

[austin3515]

That's the second thing I've learned from you within a half an hour...

Thanks!

[austin3515]

I tried to find this rule in the regs, but came up dry - can you point me in the right direction? The safe harbor regs reference only "eligibile employee" and the 401k reg defintion of "eligible employee" doesn't talk about those exlcusions.

Is it perhaps a restriction that applies solely to prototypes? (I did see what you brough up referenced in our prototype document).

[Guest Sieve]

The rule comes not from the 401(k)/(m) regs, but from the disaggregation rules in the 410(b)-7 regs (which even a SH 401(k) plan can utilize, since there is no exception to that provision in the 401(k)(m) or 410(b) regs).

That means that you can disaggregate those who do not meet statutory eligibility, and ignore them for when looking at the statutory employees' SH plan. That means that if there are any HCEs in the otherwise excludable group of employees who benefit, that "plan" would have to meet ADP/ACP for that group, but the disaggregated 401(k)/(m) plan for the statutory employees would still be a SH plan.

Of course, this only is pertinent for NHCEs, because the SH contribution need not be given to HCEs.

[austin3515]

I guess I'm just not clear why, if you pass coverage after the exlcusion, you wouldn't be able to do it... You're talking about TESTING, and this seems to have more to do with ELIGIBILITY.

Again, I assume you are correct because our documents say it, I just want to know you and Corbel are saying that

[BG5150]

See Chapter 11, Section XIV, part I, #6 in the ERISA Outline Book.

[Guest Sieve]

Look at Treas. Reg. Section 1.401(k)-1(b)(4)(vi), Ex. 2. That confirms that this approach (age & service exclusion for the SH contributions) is permissible. Here's why . . .

You can exclude otherwise excludables from the SH contribution based on the 1.410(b)-7 regs, even if they are not excluded from eligibility for deferrals. (See my last post.) By excluding them for 410(b) testing, you are disaggregating plans, and then you have 2 ADP/ACP tests to pass--one for the otherwise excludables' "plan", & one for the statutory eligibles' "plan". The former will have to pass ADP/ACP if there is an HCE in the group who benefits, and the latter can utilize the SH rules. So, you start by disaggregating for 410(b) purposes, and then you must also disaggregate for non-discrimination (ADP/ACP) purposes.

On the other hand, if you do not disaggregate based on statutory eligibility, then the general SH rule is that any NHCE eligible for the 401(k) deferral must receive the SH contribution. (Treas. Reg. Sections 1.401(k)-3 (b)(1) & -5©(1): " . . . on behalf of each eligible employee . . ." (Emphasis added).) The 1.401(k)-5 definition of eligible employee does not permit you to exclude employees from the SH contribution who are not already excluded from eligibility for the deferral (such as trainers), even though you might pass 410(b) after the SH exclusion (subject, however, to the otherwise excludable rule under the 1.410(b)-7 regs).

This is also covered in Tripodi (2008), at Chapter 11, Section XIV, Part I.6 (I see that BG already referenced Tripodi.)

So, the answer to the OP is that trainers can be excluded from the plan altogether (including deferrals), and that's ok if the plan passes coverage--the trainers, not elighible for the plan, also are not eligible for, and need not receive, any SH contribution. But, if trainers are eligible for deferrals, then they must receive the SH contribution once they have met age & service.