Excluding certain HCE's from 3% safe harbor contribution

[Richard Anderson]

May all HCE's other than the company owner be excluded from the 3% non-elective contribution in a safe harbor 401(k) plan. The owner is 30 years old; cross testing doesn't work. The owner doesn't want to give the 3% contribution to any other HCE's, but wants it for himself. Is this within safe harbor rules, if all non-owner HCE's are excluded from the non-elective contribution.

[AndyH]

The relevant notices speak to "Employees eligible to defer" in terms of those who must receive the safe harbor. I have a similar question unresolved to my satisfaction regarding class exclusions (for example, providing the safe harbors to one company which is part of a controlled group, provided it can satisfy 410(B)).

Our inhouse legal beagles say yes, you can do both, because there's nothing definitive that says you can't. I'd be interested to hear other interpretations of either question.

[M R Bernardin]

Theoretically, you could give a safe harbor contribution to less than all HCEs, since the only requirement is that all eligible NHCEs receive the safe harbor contribution. For example, we have drafted documents to provide the safe harbor for all NHCEs and all HCEs who are non-keys. There is nothing to prevent you from discriminating against other HCEs, so long as a nondiscriminatory group of employees benefits under the safe harbor contribution under 410(B) and so long as each benefitting employee receives a uniform rate of compensation under 401(a)(4). However, as the prior post indicates, the employer may be required to disclose to the other HCEs who is getting the safe harbor contribution, and that may be unpleasant.

I do not believe you can give the safe harbor only to certain members of a controlled group, unless each member is covered under a separate plan. It is not sufficient that the plan satisfy 410(B), but that all eligible NHCEs in a "plan" (as defined under 410(B)) be covered. A single plan can consist of more than one "plan" for 410(B) purposes, e.g., statutory employees vs nonexcludable employees can be disaggregated and treated as separate plans, bargaining unit employees vs other employee population can be disaggregated and treated as separate plans. But there is nothing under 410(B) that allows different control group members participating in the same plan to be disaggregated and treated as their own separate plan.

[This message has been edited by M R Bernardin (edited 02-24-2000).]

[Guest]

I also think you can exclude them.

[AndyH]

The situation I had in mind was one company with say 200 employees with a K plan who owns a subsidiary with 20 employees who have no plan. Is there anything prohibiting the larger company from adopting the safe harbor provisions for it's employees only, excluding the small subsidiary from eligibility for any plan?

In this case, the "employees eligible to defer" and "NHCEs eligible to defer" are only in the larger company.