SH 401k & Coverage

[Guest Pete Joachim]

Currently client has a non-SH 401k w/a discretionary match going to a small group of NHCEs (salaried only, excludes commission only paid NHCEs) and no HCEs receive the match. HCEs and all NHCEs can defer once meet eligibility requirements (3 months w/quartery entry dates).

If the match is changed to a SH Match - again going just to this small group of NHCEs - is there any problem with that? Obviously it passes 410(b) since no HCEs recieve the SH Match but I didn't know if something in the 401k SH rules forces them to give the SH Match to ALL NHCEs that make salary deferral contributions?

Thanks

[QNPG]

Currently client has a non-SH 401k w/a discretionary match going to a small group of NHCEs (salaried only, excludes commission only paid NHCEs) and no HCEs receive the match. HCEs and all NHCEs can defer once meet eligibility requirements (3 months w/quartery entry dates).

If the match is changed to a SH Match - again going just to this small group of NHCEs - is there any problem with that? Obviously it passes 410(b) since no HCEs recieve the SH Match but I didn't know if something in the 401k SH rules forces them to give the SH Match to ALL NHCEs that make salary deferral contributions?

Thanks

Including all "eligible" NHCEs who defer is one of the ADP/ACP safe harbor requirements.

[GMK]

I believe the SH match has to go to all eligible employees (or at least to all who defer, depending on your SH arrangement):

http://www.irs.gov/retirement/article/0,,id=119625,00.html

As proposed it's not really SH, because all eligible employees (or all who defer) don't get the match.

[Guest Pete Joachim]

I figured since the term "eligible" isn't defined in the regs for this purpose - it would instead rely on the Plan's definition of "eligible". But I could be wrong and I could see where it may not meet the "spirit" of the law. The gov't gives a SH Plan a pass on the ADP/ACP Test and Top Heavy Test if the sponsor is willing to give "x" amount of dollars to "eligible" employees. Giving the SH Match to small group of NHCEs may not fit the bill - even if it passes 410(b) and no HCEs get the SH Match. But I'm not sold yet...

[Kevin C]

Eligible NHCE as used in the SH regs is defined in 1.401(k)-6.

Eligible employee—(1) General rule. Eligible employee means an employee who is directly or indirectly eligible to make a cash or deferred election under the plan for all or a portion of the plan year. For example, if an employee must perform purely ministerial or mechanical acts (e.g., formal application for participation or consent to payroll withholding) in order to be eligible to make a cash or deferred election for a plan year, the employee is an eligible employee for the plan year without regard to whether the employee performs the acts.

(2) Conditions on eligibility. An employee who is unable to make a cash or deferred election because the employee has not contributed to another plan is also an eligible employee. By contrast, if an employee must perform additional service (e.g., satisfy a minimum period of service requirement) in order to be eligible to make a cash or deferred election for a plan year, the employee is not an eligible employee for the plan year unless the service is actually performed. See §1.401(k)-1(e)(5), however, for certain limits on the use of minimum service requirements. An employee who would be eligible to make elective contributions but for a suspension due to a distribution, a loan, or an election not to participate in the plan, is treated as an eligible employee for purposes of section 401(k)(3) for a plan year even though the employee may not make a cash or deferred election by reason of the suspension. Finally, an employee does not fail to be treated as an eligible employee merely because the employee may receive no additional annual additions because of section 415©(1).

(3) Certain one-time elections. An employee is not an eligible employee merely because the employee, no later than the employee's first becoming eligible to make a cash or deferred election under any plan or arrangement of the employer (described in section 219(g)(5)(A)), is given the one-time opportunity to elect, and the employee does in fact elect, not to be eligible to make a cash or deferred election under the plan or any other plan or arrangement maintained by the employer (including plans not yet established) for the duration of the employee's employment with the employer. This rule applies in addition to the rules in §1.401(k)-1(a)(3)(v) relating to the definition of a cash or deferred election. In no event is an election made after December 23, 1994, treated as a one-time irrevocable election under this paragraph if the election is made by an employee who previously became eligible under another plan or arrangement (whether or not terminated) of the employer.

Eligible HCE. Eligible HCE means an eligible employee who is an HCE.

Eligible NHCE. Eligible NHCE means an eligible employee who is not an HCE.

[Guest Pete Joachim]

Okay - think I'm done playing the devils advocate. :angry: Per Kevin's response above and as others have suggested - we go back to the defintion of "eligible employee" used for all purposes of the 1.401(k) regs (as opposed to me looking for a special definition applicable solely to SH 401k plans) which clearly means I have to cover my commissioned NHCEs who elect to contribute salary deferrals (along with my salaried NHCEs) even if I don't match the HCEs and regardless of my positive 410(b) result.

Figured this was the answer.....but also figured I'd hash it out a little to be sure.

Thanks everyone...