Safe harbors & eligibility requirements

[Guest Beth N]

Can someone confirm that the following meets the safe harbor guidelines: Employer's plan allows EEs to defer immediately, but EEs are not eligible to receive match until they have one year of service, at which time they will start getting the match on the next plan entrance date (Jan 1 or July 1). As long as the contribution safe harbors are met (ADP & ADP), there's no problem with keeping these eligibility requirements, are there? Thanks.

[MWeddell]

If the plan also requires participants to have attained age 21 (in addition to the year of service plus next semi-annual entry date requirement that you mention), then you may disaggregate the plan into the portion that benefits employees that could have been excluded using the greatest age and service conditions allowed by Code Section 410(a), which is still subject to ADP/ACP testing (if there are any HCEs), and the portion that benefits all other eligible employees, which satisfies the ADP/ACP safe harbor requirements. That is permissible. See Section VIII(H) of IRS Notice 98-52.

If there isn't an age 21 requirement for the match, you might want to add it in the make the plan design completely legal. If you proceed without the age 21 requirement for the match, technically I don't think it satisfies the Notice 98-52 requirements, but there's a good chance you could still get a favorable IRS determination letter approving the plan design. I don't see that the IRS would have any policy objections against the plan design and it'd be awfully technical for the IRS to reject the plan design because you're letting < age 21 employees who have a year of service receive the match.

Note that you may occasionally get some HCEs in the otherwise excludable group. Employees who are 5% owners are HCEs right from the day they are hired, and it's not unheard of to hire an employee after July 1 and have the employee still earn $80,000+ between his/her hire date and when the plan year ends on December 31.

[QDROphile]

While I am a big fan of close and literal readings, I don't think the Notice requires using age and service requirements that are both below the statutory minimums in order to disaggregate. That would be rather tricky and the IRS should be more forthcoming if they really mean it that way.

[Guest Beth N]

My question was narrower, I think. The employer doesn't want to have to do ACP/ADP testing at all - so disaggregation is not an option. I'm looking for support for the statement (which I've seen made on this website by Alan Simpson) that the safe harbor requirements do not allow a 1,000 hrs of service requirement in order to receive the match. In other words, can someone confirm (with citation) that a 1,000 hrs requirement will kick me out of the safe harbor? I see in 98-52 that a last day of plan year requirement is not allowed (example 4, part V-b). Is that what will also preclude a 1,000 hrs requirement?

[Alf]

The example, Section V.B.1.a., and Section V.B.2. all state that safeharbor contributions must be made on behalf of each NHCE who is an eligible employee.

There are at least two ways to demonstrate that this precludes a 1,000 requirement. First, the 1,000 hour requirement mentioned in your facts is, literally, only an allocation requirement, not an eligibility requirement. The imposition of this allocation requirement would mean that safeharbor contributions were not going to all eligible employees. Second, although it is tempting to think of matching contributions as a seperate "plan" for purposes of these safeharbor provisions, they are not. Section IV.A. provides that the 1.401(k)-1(g)(11) definition of "plan" applies. 1.401(k)-1(g)(11)(ii) provides that (k) and (m) components are not mandatorily disaggregated for these purposes.

Although V.B.3.Ex.4 does not mention a 1,000 year requirement as violating the safeharbor requirements, it clearly is precluded.

[Guest Beth N]

Thanks - makes sense now.