Different Eligibility for Plan Participants

[suzeq4ever]

I have a Safe Harbor 401k Plan with a 90 day eligibility. However, my client wants to carve out the warehouse employees because of the high turnover in that department and have a 1 year eligibility for them. We can pass the coverage tests by excluding this group all together, but they want to give this group an incentive to stay. Can you have one plan with different eligibility specs for different employee classes? Any feedback would be appreciated. Thanks Susan

[QNPG]

I have a Safe Harbor 401k Plan with a 90 day eligibility. However, my client wants to carve out the warehouse employees because of the high turnover in that department and have a 1 year eligibility for them. We can pass the coverage tests by excluding this group all together, but they want to give this group an incentive to stay. Can you have one plan with different eligibility specs for different employee classes? Any feedback would be appreciated. Thanks Susan

The plan may take advantage of the “otherwise excludable employee" rule (i.e., permissive disaggregation) to divide the plan into two plans for testing. The “upper group" plan includes all participants who would have entered the plan if the plan had a year of service/age 21 eligibility condition. The “lower group" plan includes all other plan participants (generally those with less than a year of service). The NHCEs (or all participants) in the upper group plan will receive the safe harbor contributions, thus satisfying the safe harbor requirement. The lower group plan is considered a separate plan, and since the participants would not be receiving safe harbor contributions, that “plan" must satisfy the ADP test. Note: Generally, the lower group plan would automatically satisfy the ADP test because it would be composed solely of NHCEs.

[Tom Poje]

just to make sure, there is certainly nothing wrong with having a plan that has a 90 day eligibility to defer and a 1 year wait for safe harbor.you lose the top heavy free exemption. (This is possible because you can run an ADP test in two parts - those with one year and those less than one year. the group who has less than one year passes because you can test all HCEs as if they had a year of servcie. the group with 1 year passes because that is safe harbor.)

if what you are asking is can I also provide the safe harbor to a select group that only has worked 90 days, I don't know if that is possible, don't recall seeing standard document language that would permit this. I would think this vioaltes the principal that says anyone eligible to defer must get the safe harbor, but if you want you can exclude those who are otherwise excludables. Otherwise you end up with an otherwise excludable group that consists of those who have received a safe harbor and others who have not. That seems a bit inconsistent. but then I've been wrong before...

[Kevin C]

I read the question a little different. I see it as asking if they can have 90 day eligibility for everyone but the warehouse people and 1 year of service required for the warehouse people for the entire plan.

Our VS 401(k) document has an option that has immediate eligibility for full time employees and requires a year of service for part time employees. It goes on to let you define what is considered to be part time. That isn't exactly what is wanted here, but it is an IRS approved provision that has different eligibility requirements for different groups of employees. It also has an other line for eligibility requirements. As long as what you are doing doesn't cause the plan to violate section 410(a), doesn't play games using short service employees to pass testing and doesn't conflict with other plan provisions, I think you should be ok. If you use a pre-approved document, your document provider should be able to tell you if what you want to do works in their document. If the answer isn't clear-cut, it's always a good idea to check with an ERISA attorney.

[suzeq4ever]

just to make sure, there is certainly nothing wrong with having a plan that has a 90 day eligibility to defer and a 1 year wait for safe harbor.you lose the top heavy free exemption. (This is possible because you can run an ADP test in two parts - those with one year and those less than one year. the group who has less than one year passes because you can test all HCEs as if they had a year of servcie. the group with 1 year passes because that is safe harbor.)

if what you are asking is can I also provide the safe harbor to a select group that only has worked 90 days, I don't know if that is possible, don't recall seeing standard document language that would permit this. I would think this vioaltes the principal that says anyone eligible to defer must get the safe harbor, but if you want you can exclude those who are otherwise excludables. Otherwise you end up with an otherwise excludable group that consists of those who have received a safe harbor and others who have not. That seems a bit inconsistent. but then I've been wrong before...

[QNPG]

I read the question a little different. I see it as asking if they can have 90 day eligibility for everyone but the warehouse people and 1 year of service required for the warehouse people for the entire plan.

Our VS 401(k) document has an option that has immediate eligibility for full time employees and requires a year of service for part time employees. It goes on to let you define what is considered to be part time. That isn't exactly what is wanted here, but it is an IRS approved provision that has different eligibility requirements for different groups of employees. It also has an other line for eligibility requirements. As long as what you are doing doesn't cause the plan to violate section 410(a), doesn't play games using short service employees to pass testing and doesn't conflict with other plan provisions, I think you should be ok. If you use a pre-approved document, your document provider should be able to tell you if what you want to do works in their document. If the answer isn't clear-cut, it's always a good idea to check with an ERISA attorney.

I must have missed the entire premise of the question! Sorry guys.

[suzeq4ever]

thank you for your feedback. I was able to write this into the plan document without an issue, so my client is very happy...

[QDROphile]

Kevin C:

Can you confirm that the eligibility that you describe can be used for an ADP safe harbor plan? The design is one that the IRS has approved as a failsafe in controversies over section 410(a) compliance, but I cannot conclude that it works for a safe harbor design. I think if you exclude anyone from elective deferrals based on a year of service, you have to exclude everyone.

[Kevin C]

Kevin C:

Can you confirm that the eligibility that you describe can be used for an ADP safe harbor plan? The design is one that the IRS has approved as a failsafe in controversies over section 410(a) compliance, but I cannot conclude that it works for a safe harbor design.

I don't see any reason why the SH status would affect whether or not you could use the eligibility provision I mentioned in my post. I don't see any restrictions on deferral eligibility mentioned in 1.401(k)-3 or 1.401(m)-3. You would need to make sure that all NHCE's eligible to defer in the plan receive the SH contribution. I read the OP as saying they wanted the provision to apply to the entire plan, so that wasn't an issue. The adoption agreement for our VS document does not have any comments or warnings about use of the provision with a SH plan. I don't see any cautions about it in the base document, either. I also tried using that provision in a SH match document and ran the validation routine with no errors reported. I did not ask our document provider about it.

I think if you exclude anyone from elective deferrals based on a year of service, you have to exclude everyone.

Can you point me towards what you think requires this?

[QDROphile]

A combination of 1.401(k)-3(h)(3), 1.401(k)-2(a)(1)(iii), and 1.401(k)-1(b)(4)(iv) and (vi) Example 2. I find no direct statement for my conclusion.

I am omitting consideration of separate groups of collective bargaining employees and SLOBs.

[Kevin C]

QDRO,

I don't think you and I are referring to the same situation. If you change your statement to "if you exclude anyone from the safe harbor contribution based on a year of service, you have to exclude everyone", I agree with you.

1.401(k)-3(h)(3) & 1.401(k)-2(a)(1)(iii) combine to say that the ADP/ACP carve out testing option to exclude NHCE otherwise excludables from the test is not available for safe harbor plans. 1.401(k)-1(b)(4)(iv) and (vi) Example 2 say that "Plan" for ADP/ACP purposes is the same as "Plan" for 410(b) purposes, which is determined after applying mandatory and permissive aggregation/disaggregation. So, you have to count all of the otherwise excludables when you determine if the disaggregated otherwise excludable "plan" satisfies the safe harbor rules. If some of the otherwise excludables receive the SH contribution, but not some others do not, you will fail the requirement that all eligible NHCE's receive the SH.

I was referring to plan eligibility. The have to be eligible to defer before they are considered otherwise excludable. See 1.410(b)-6(b)(3). If full time employees enter immediately and part-time employees are subject to a year of service requirement, the only otherwise excludables will be full time. The part time employees who have not completed the year of service requirement and met their entry date are not otherwise excludable, the are just ineligible. As long as the provisions don't cause a coverage failure or other problems as mentioned in my first post, I don't see a problem. The SH rules only deal with eligible NHCEs and eligible HCE's.

[QDROphile]

I agree that the crux of the language in 1.401(k)-1(b)(4)(iv) is the word "eligible" (two occurrences), which suggests that there can be another criterion for eligibility besides year of service or other statutory exclusion, but I am very nervous about that as the foundation for a design that allows all class A employees to participate in elective deferrals and safe harbor contributions immediately, but allows no class B employees to participate in elective deferrals (or safe harbor contributions) until after a year of service. Section 1.401(k)-1(b)(4)(i) tells us that 1.401(k)-1(b)(4)(iv) is the sole rule for disaggregation for ADP testing, and 1.401(k)-1(b)(4)(iv) lists only certain bases for disaggregation. The exclusion based on year of service is on the list. A distinction between class A and class B is not on the list. If class A employees without a year of service can elect deferrals, the class A employees cannot be disaggregated for ADP testing from the class B employees without a year of service. If the classes cannot be disaggregated, then if one class gets a safe harbor contribution, the other must. That makes no sense if one class can elect deferrals and the other can't. I know we can't have examples in the regulations for every imginable scenario, but when a regulation is, by its terms, exclusive, then one wants to find the fit somewhere in the regulation.

[Kevin C]

If class A employees without a year of service can elect deferrals, the class A employees cannot be disaggregated for ADP testing from the class B employees without a year of service.

I don't think it really matters whether or not you can disaggregate in this case. ADP/ACP testing only includes eligible employees, which in your example, class B employees are not. So, aggregating the ineligible class B employees has no impact at all on the testing.

If the classes cannot be disaggregated, then if one class gets a safe harbor contribution, the other must.

The missing piece is that the SH rules only require that all eligible NHCE's get the SH. There is no requirement that someone ineligible to defer has to receive anything.

That makes no sense if one class can elect deferrals and the other can't.

I agree. But, I think that indicates a flaw in your example. The rules do make sense here because of the frequent use of the term "eligible employee".

Wouldn't the situation you are describing be the same with a plan that has 6 month eligibility for deferrals? Those with less than 6 months of service have less than a year of service, but they are being treated differently than those with 6-12 months of service. The important difference is that one group is eligible to defer and the other is not.