SH NEC - do you have to add to PS for testing necessarily?

[mwyatt]

Situation is following: plan provides for deferrals, 3% non-elective safe harbor, and a cross-tested profit sharing plan. Safe Harbor is provided to all participants. Daughter of owners now eligible for plan in 2011. She is in her own class for the PS component; unfortunately she is by far the youngest participant (HCE and NHCE) so testing is a problem.

Usually when running Ratio Percentage, Non-Discriminatory Classification and Gateway testing have aggregated the SH and PS contributions together. Generally is more favorable result and usually provides for lower Gateway contribution since can take into account the SH component (say if 3% SH, 12% highest PS allocation to HCE, then aggregate Gateway for NHCEs would be 5% - 3% = 2% PS to NCHEs; if ignore SH, Gateway PS would be 4%). However this young HCE is killing things.

In looking at 401(k) final regulations, see following in 1.401(k)-3(h)(2):

Use of safe harbor nonelective contributions to satisfy other nondiscrimination tests. A safe harbor nonelective contribution used to satisfy the nonelective contribution requirement under paragraph (b) of this section may also be taken into account for purposes of whether a plan satisfies section 401(a)(4).

I focus on that all-important word "may" in the preceding. Would it be permissible to run my Cross-Testing in this situation by only taking into account the Profit Sharing contribution for ratio percentage, non-discriminatory classification and gateway testing (Average Benefits Test would of course include all sources: deferrals, Safe Harbor, and Profit Sharing for the 70% of HCE <= NHCE average) or am I reading into "may" too much here? Don't have a problem with providing a higher PS contribution for gateway by ignoring Safe Harbor as initial results were horrible.

Any thoughts?

[rcline46]

I have 2 words for you - component plans.

[chc93]

What about component plans. Component #1 with owners cross-tested on benefits basis. Component #2 with daughter tested on contributions basis. This has helped us in cases with a young child entering such plans.

edit: Oops... rcline beat me to it... while I typed.

[Tom Poje]

lets suppose I have a plan that matches deferrals but not catch up contributions.

plan matched $ for $. fails ADP so some deferrals are treated as catch up.

1.414(v)-1(d)(2)(iii) says

"matching contributions with respect to such elective deferrals are permitted to be forfeited under the rules..."

would you interpret that to say "I'm permitted to, but don't have to?"

but all that aside, the same regs that say 'may' also go on to say that the safe harbor is not subject to the QNEC rules (you hae to test a(4) with and without a QNEC) but rather that the safe harbor is treated as a nonelective (though every where else a safe harbor is defined as a QNEC)

so I think in this case the 'may' simply means normally you treat QNECs one way, but in this case you may (or possibly better) "you handle things this way because its an exception to the rule.

.......

somewhere buried in the ERISA Outline Book is a discussion about "may". I don't think its in context with safe harbors, but as I recall its a similar situation.