Non-elective safe harbor contribution for newly eligible employee

[Guest cereader]

I thought this was an easy question.

A client makes a non-elective 3% safe harbor 401k contribution. He hired an employee in October 2008 who was eligible for deferrals on November 1st, 2009 as entry dates are the first of the following month. The SPD states "you will be eligible to participate for purposes of salary deferrals and safe harbor contributions when you have completed one year of service and attained age 21."

It was my understanding that the employer's 3% non-elective contribution would be made on compensation earned by the participant in November and December. Others are saying that the employer must contribute 3% of the entire year's compensation since she became eligible in 2009.

Can anyone clarify/settle this for me?

Thank you.

[D Lewis]

What does the document say in it's definition of compensation?

If it says compensation prior to entry date is excluded, then the SH contribution is based on the compensation earned after the entry date (11/1 in your example).

If it says compensation prior to entry date is included, then the SH contribution is based on the full year's compensation.

[Guest cereader]

What does the document say in it's definition of compensation?

If it says compensation prior to entry date is excluded, then the SH contribution is based on the compensation earned after the entry date (11/1 in your example).

If it says compensation prior to entry date is included, then the SH contribution is based on the full year's compensation.

Thanks for your reply.

I find the section on compensation particularly generic, and vague in reference to the point you raise. Perhaps you or others see it differently though.

"Compensation: For the purposes of the Plan, compensation has a special meaning. Compensation is generally defined as your total compensation that is subject to income tax withholding and paid to you by your Employer during the Plan Year."

"Safe Harbor Contributions: Adjustments to compensation. The following adjustments to compensation will be made for purposes of safe harbor contributions: salary deferrals to this Plan and to any other plan or arrangement (such as a cafeteria plan) will be included."

I've read this document ten times today. Here are the only other sections that I find relevant:

"Eligibility conditions: You will be eligible to participate for purposes of salary deferrals AND safe harbor contributions when you have completed one (1) Year of Service and have attained age 21. However, you will actually enter the Plan once you reach the Entry Date as described below. Entry Date: For purposes of salary deferrals, your Entry Date will be the first day of the month coinciding with or next following the date you satisfy the eligibility requirements."

and

"Safe Harbor Nonelective Contribution: In order to maintain safe harbor status, your Employer may make a contribution equal to at least 3% of your compensation."

If we were to agree that the document doesn't specify how compensation prior to the entry date should be treated, is there a default or is it left to the discretion of the trustee?

Thank you for your help. I appreciate it.

[K2retire]

I would be very surprised if the document doesn't address this. If it is a prototype or volume submitter document, you should be able to find check box options that address this -- even if they were not checked in your particular document. It will probably be in a separate paragraph soon after the definition of compensation that you quoted. If it is an individually drafted document, it becomes more tedious to find.

If there truly is no language about that, then you probably have to use full year compensation.

[Guest Sieve]

creader --

The language you're quoting is most probably from the Summary Plan Description, and not from the Plan document. Find or get the Plan document--the information you are looking for will be in the section defining Compensation, or the Section describing allocations of the SH contribution. Or, there will be a separate definiton of Compensation which relates specifically to the SH contribution. If the Plan uses an Adoption Agreement, there shouold be a check box to answer your question.

If the Plan happens to be top heavy, full plan year compensation must be used.

[Bill Presson]

If the Plan happens to be top heavy, full plan year compensation must be used.

Not if it's just deferrals and safe harbor contributions.

[Guest Sieve]

Bill -- Yes, sorry for misleading. If there are only deferals and SH contributions, then TH is not an issue. But, if there are any PS contributions or forfeitures, then a 3% SH NEC contribution from commencement of participation in the plan may not be sufficient.