Safe Harbor Non-Elective Amendment

[Guest notapensiongeek]

We administer a 401(k) plan that provides for a fixed (vs. wait-and-see) 3% SHNEC to all eligible employees, including HCE's. Is it permissible to amend the plan after the plan year has already started so that the SHNEC is only allocated to to NHCE's (i.e., exclude HCE's from the allocation)? There is no substantial business hardship.

[Lou S.]

That is a good question and I'm not sure I have a good answer but I think the answer is no unless the notice addresses it. That is the notice specifically says that HCEs will not be eligible. You may also have a stronger argument if HCEs were excluded in past years.

It does bring up an interesting question can you have a Maybe-Maybe notice? That is can your SH notice say we might make a 3% contribution and it may or may not be made to HCEs if we do decide to make it?

If you can should notices always be drafted this way for maximum flexibility?

[QNPG]

We administer a 401(k) plan that provides for a fixed (vs. wait-and-see) 3% SHNEC to all eligible employees, including HCE's. Is it permissible to amend the plan after the plan year has already started so that the SHNEC is only allocated to to NHCE's (i.e., exclude HCE's from the allocation)? There is no substantial business hardship.

I think this would be considered a "discretionary" amendment (as apposed to a interim amendment or corrective amendment), and therefore, would be required to be executed no later than the last day of the plan year for which it applies. Even so, the 3% SHNE does not have an allocation requirement so I would imagine that you would also have a cut-back issue if it was taken from them after it was acrrued (end of year of after).

Just my two cents

[Kevin C]

No, the 3% SHNEC provisions are part of the provisions that satisfy reg. 1.401(k)-3, so 1.401(k)-3(e)(1) prevents you from amending them during the year. We have proposed changes to the 401(k) & 401(m) regulations that allow a reduction or suspension of the SHNEC if there is a substantial business hardship, but you indicated that is not the case here.

Do they want the change bad enough to do a short plan year?

[Guest notapensiongeek]

The reason for the amendment is the owner's son now works there full time. With the son receiving the 3% SH, it will cost significantly more to get the owner to the 415 limit.

Thanks for all the input, much appreciated.

[four01kman]

I suppose having the son work "less than full-time" is not an option.

[Guest notapensiongeek]

Unfortunately no, that isn't an option. He's already worked well over 1,000 hours.

[rcline46]

This sounds like a new comparability plan. if it is, your document should have everyone in their own group, so the son gets a -0- profit sharing. If you blew it and this is not so, then test using component plans and son becomes a non-issue.