401(k) 3% nonelective

[Belgarath]

Interesting question came up. Employer has a calendar year plan. Was a PS plan only, and was amendmed to add a 401(k) provision, including the 3% safe harbor, on July 1.

Several participants terminated PRIOR to July 1. Must they receive the 3%? The IRS approved prototype document language is basically silent on this issue; the adoption agreement says "for purposes of the ADP test safe harbor contribution, the term "eligible participant" means any participant who is eligible to make elective deferrals..."

Depending upon your interpretation, the regulations, including example 4 of 1.401(k)-3©(7) don't really address this directly.

Since the plan is using plan year comp for the safe harbor contribution, my interpretation is to say that yes, since participants who remain are receiving the 3% based upon comp prior to the safe harbor being implemented, the same treatment must be accorded those who terminated, in spite of the potentially opposite conclusion based solely upon the AA language. But I can see a reasonable argument being made for the opposite interpretation - in other words, taking the AA at face value and not overthinking the issue.

Just wondered if anyone else had grappled with this rather specific situation?

Hmmm - the more I think about this, the more I disagree with my initial conclusion. I think they don't need to receive it. If they return to work this year, they are immediately eligible, and would then have to get it based upon entire plan year comp. Otherwise, since they were never eligible to defer, they don't need to receive it.

[chc93]

We've had this situation with a volume submitter document. The document wasn't very specific, only that deferrals can begin July 1. The attorney told us that since participants become eligible for salary deferrals on July 1, only compensation from July 1 should be used for the 3% safe harbor. In addition, any participant who terminated before July 1 was never eligible to defer, so doesn't need to get the 3% safe harbor. FWIW

[Kevin C]

If the document says you have to be eligible to defer to receive the SH, I think that answers your question.

When you are looking at 1.401(k)-3, are you also considering the definitions of "eligible employee" and "eligible NHCE" in 1.401(k)-6?