Improper Inclusion of HCE in Safe Harbor Nonelective Contribution

[Guest Ignatius J. Reilly]

A company has 401(k) plan with a safe harbor nonelective contribution. Only NHCEs are eligible. Their CEO is leaving. In the course of putting together documents for his departure, we realized that he has been participating in the safe harbor contribution since the beginning of his employment in 2006.

My initial thought would be self-correction by plan amendment, given that it's permissible to have HCEs participate in safe harbor nonelective contributions (the company simply chose not to in initially structuring its plan). However, this obviously could result in having to make additional contributions for other HCEs who were not included in the safe harbor contributions. Any thoughts regarding the plan amendment correction and/or any other potential corrections?

[ETA Consulting LLC]

Those amounts deposited to his account represent funds that he was not entitled to under the written terms of the plan; and should likely be forfeited to the plan. It's one thing to catch it during a single year, but when it happens over several years it brings into question how those amounts were deductible when allocated to someone not eligible to receive them. It doesn't seem major on the surface, but you may consider VCP to forfeit (and possible offset the Safe Harbor contribution for the current year).

The key is that he's not entitled to the contribution under the terms of the plan; this is what you are correcting.

Good Luck!

[QNPG]

Those amounts deposited to his account represent funds that he was not entitled to under the written terms of the plan; and should likely be forfeited to the plan. It's one thing to catch it during a single year, but when it happens over several years it brings into question how those amounts were deductible when allocated to someone not eligible to receive them. It doesn't seem major on the surface, but you may consider VCP to forfeit (and possible offset the Safe Harbor contribution for the current year).

The key is that he's not entitled to the contribution under the terms of the plan; this is what you are correcting.

Good Luck!

It seems that the contribution can be treated as an employer contribution that has not been allocated yet (i.e., the HCE was not eligible to receive the contribution, hence it is still categorized as an employer contribution that has not been allocated).

[PensionPro]

A company has 401(k) plan with a safe harbor nonelective contribution. Only NHCEs are eligible. Their CEO is leaving. In the course of putting together documents for his departure, we realized that he has been participating in the safe harbor contribution since the beginning of his employment in 2006.

My initial thought would be self-correction by plan amendment, given that it's permissible to have HCEs participate in safe harbor nonelective contributions (the company simply chose not to in initially structuring its plan). However, this obviously could result in having to make additional contributions for other HCEs who were not included in the safe harbor contributions. Any thoughts regarding the plan amendment correction and/or any other potential corrections?

Provided your plan document allows and non-discrimination testing passes, why not treat it as a profit sharing contribution? Vesting may or may not be an issue.

[Guest Ignatius J. Reilly]

Thank you all for your responses. Clearly, I will need to revisit my approach to handling this issue.