eligible to noneligible status

[pmacduff]

calendar year safe harbor 401(k) plan with safe harbor basic match. Plan specifically excludes a category of employee that they call "TAR" (time as reported) which is basicially a per diem definition.

There are 2 employees who were full-time & participating, went part-time continuing to participate and now are moving to the "TAR" category as of July 1st.

After referencing the Plan Doc info these participants are no longer eligible to defer and receive the safe harbor match. I also believe, although cannot find it clearly stated, that they cannot receive distribution of their vested account balance until they completley sever employment.

My questions really relate to their eligibilty to make a deductible traditional IRA contribution - Are they considered "covered" for 2011 since they were active in the plan through June 30th? Therefore 2012 would be the first year that they can make a deductible IRA contribution (depending on their AGI)?

[ETA Consulting LLC]

You are correct that there is not anti-cutback provision for participant, so they are no longer eligible to contribute (or receive match) upon becoming a member of an excluded class. You are also correct they they are still employed and therefore no eligible for a distribution (e.g. severance of employment is much different from moving to a excluded class). You are also correct with respect to their inability to fund a deductible contributoin to a traditional IRA in 2011, since they 'contributed' to the 401(k) at work during 2011.

As for 2012, you should keep in mind that 'covered by plan at work' means that they actually "RECEIVED A CONTRIBUTION" to a DC plan or 'accrued a benefit' in a DB plan. So, unless they are married with a spouse covered by a plan at work in 2012, they would be able to fully deduct the traditional IRA. There is no phaseout based on compensation if they (or their spouse) are not covered by a plan at work.

Good Luck!