Safe Harbor / 401k = Different Eligibility Allowed?

[jmartin]

I know that you can apply statutory exclusions when giving the Safe Harbor contribution, provided your eligibility is less than 21/1. In relation to that topic, can a plan have immediate eligibility for 401k but a one year requirement for safe harbor?

Or would they both need to be immediate, but then the company could apply the stat exclusion for safe harbor?

[cpc0506]

You can use the statutory exclusions for the Safe Harbor contribution and allow immediate entry for the 401k but remember that the top heavy exemption no longer applies. So you will need to check if the plan is top heavy and if so, the partcipant deferring but not eligible for the safe harbor contribution is required to receive a top heavy 3% contribution.

[BG5150]

You can use the statutory exclusions for the Safe Harbor contribution and allow immediate entry for the 401k but remember that the top heavy exemption no longer applies. So you will need to check if the plan is top heavy and if so, the partcipant deferring but not eligible for the safe harbor contribution is required to receive a top heavy 3% contribution.

Also, if it's a SH Match, EVERYONE needs to get at least 3% ER money.

[12AX7]

You can use the statutory exclusions for the Safe Harbor contribution and allow immediate entry for the 401k but remember that the top heavy exemption no longer applies. So you will need to check if the plan is top heavy and if so, the partcipant deferring but not eligible for the safe harbor contribution is required to receive a top heavy 3% contribution.

Also, if it's a SH Match, EVERYONE needs to get at least 3% ER money.

If the plan is Top Heavy all participants (employed on last day of plan year) get the TH minimum regardles of the type of SH arrangement. Also, if there are HCEs in the group not getting the SH contribution, that part of the plan does not meet the ADP SH and is subject to the ADP test.

edit: SH contributions would be credited toward the TH min.

[ETA Consulting LLC]

Just to clarify, if the SH Contribution; whether non-elective or match(formula), is provided to all Non-Keys (including those who are HCE), then you may be exempted from the Top Heavy when the only contributions made under the plan fall under the Safe Harbor.

The key here is that it's not exactly "everyone", but everyone who is a non-key (including those HCEs who are non-key).

Good Luck!

[12AX7]

Good point to distinguish between the HCE Key and HCE Non-key in this example. This gets into more advanced design concepts that need to be monitored.

[ETA Consulting LLC]

Just wanted to throw it out there to be clear on the rule. When I first learned of the Safe Harbor exception to TH, I learned 'as long as the plan was safe harbor (and no additional contributions were made outside of safe harbor ADP or ACP), then the plan was excepted from TH'. This failed to recognize that under the safe harbor, all Non-key employees (including those who are HCE) must be included in the safe harbor contribution. I, incorrectly, believed that you could give the Safe Harbor to NHCEs only and still be exempted from TH.

There 'may' be practitioners today that are under that impression

[Kevin C]

Where might we find information on this requirement that non-Key HCEs must receive the SH to be Top-Heavy exempt?

My understanding of the rule is based on Rev. Ruling 2004-13, situation 4 and a similar Q&A question at the 2010 ASPPA Annual Conference (bottom of page 10 of the handout). Both specify that all eligible NHCEs in the entire plan must receive the SH to be TH exempt, but neither mentions Non-Key HCEs having to receive the SH. The Q&A response does caution that if the TH plan only provides the SH to those 21 & 1yr, all non-Keys get the TH-minimum, not just those in the otherwise excludable group.

[ETA Consulting LLC]

Good point!

[John Feldt ERPA CPC QPA]

I, incorrectly, believed that you could give the Safe Harbor to NHCEs only and still be exempted from TH.

My understanding of the rule is based on Rev. Ruling 2004-13, situation 4 and a similar Q&A question at the 2010 ASPPA Annual Conference (bottom of page 10 of the handout).

Is ERISAtoolkit's conclusion reached based on the text in Rev. Ruling 2004-13?

In situation 4, we have a 401(k) plan with safe harbor contributions that satisfy 401(k)(12). The plan covers all employees, HCEs and NHCEs. Only deferrals and SH, no forfeitures.

Is there a reference to non-key employees in there to make the plan fail to be top heavy exempt? It doesn't seem to say that a plan fails to be TH exempt if any HCE excluded from SH is also non-key.

Perhaps we compare the under 21/1 group with the over 21/1 group. Say the under 21/1 group is like the HCEs who are excluded from SH. The over 21/1 group is analogous to those employees who are getting the SH. You're saying those excluded from SH are all key, then no problem, you can still be TH exempt. If that is so, then in situation 4, if all of the employees under 21/1 are key, then it would be TH exempt. Did the IRS fail to mention that possibility in the Rev Ruling? For example, suppose only an owner's child is in the under 21/1 group.

edit: typo

[Gadgetfreak]

Now this conversation got me confused. Admittedly, I can't think of any plans I currently manage that exclude HCEs from the SH but this is an interesting topic. However, I believed that, to be exempt from TH in a SH Plan, all non-keys must received the SH. After all, if the TH test is looking at keys vs. non-keys, wouldn't one reason that you could not discriminate against ANY non-keys (including HCEs) to satisfy the TH requirements?

[Kevin C]

I probably should have been more clear in my post #8. I don't think there is a requirement that all non-key HCE's receive the SH to be top heavy exempt. It's not mentioned in Code Section 416(g)(4)(H) or Rev. Ruling 2004-13. It was also not mentioned in the 2010 Q&A item dealing with the TH exemption for SH plans. This thread was the first time I've seen or heard anyone say there is such a requirement. There is always the chance I've overlooked something which is why I asked where this requirement can be found, if it indeed exists.

We don't limit the SH to only NHCEs very often, but we have a few plans that do.

[jmartin]

Wow my first "hot topic"!

Fortunately for the plan I was asking for, there are no Keys and only one HCE. The plan is 0% top heavy (the owners take no comp in the plan). Looks like I have it easy. So is it safe to assume I can have different eligibility then? Or do both 401k and SH need to be immediate and I just invoke stat exclusions?

[John Feldt ERPA CPC QPA]

Here's the 2010 Q&A, bottom of page 10:

Question:

Must a safe harbor 401(k) plan that is top-heavy and provides for “split eligibility" (safe harbor contributions are made only to the “upper group" (participants who have attained age 21 and have completed one year of service) and not to the “lower group" (participants with less than one year of service and under age 21)) provide a top-heavy minimum allocation to the lower group's non-key participants employed on the last day of the plan year?

IRS response:

If the safe harbor contribution is not provided to ALL eligible NHCs then the entire plan is subject to the top heavy rules. So if the plan is top heavy, all non-key employees must get the top heavy minimum allocation, not just the NHCs whoa re in the "lower group." However, the safe harbor contribution provided to the "upper group" is counted toward determining if the top heavy minimum contribution liability is satisfied.

Kevin C - it seems that we agree then. This Q&A doesn't say the TH exemption is blown if some HCE non-keys are not getting SH.

I'd like to see another post from the toolkit.

[John Feldt ERPA CPC QPA]

Wow my first "hot topic"!

Fortunately for the plan I was asking for, there are no Keys and only one HCE. The plan is 0% top heavy (the owners take no comp in the plan). Looks like I have it easy. So is it safe to assume I can have different eligibility then? Or do both 401k and SH need to be immediate and I just invoke stat exclusions?

Congratulations! Based on your facts, you can certainly exclude the SH for those under 21/1, but allow deferrals immediately. If an owner's kid (or any HCE) gets into the under 21/1 group, you could have a ADP testing issue if they defer.

[Gadgetfreak]

Here's the 2010 Q&A, bottom of page 10:

Question:

Must a safe harbor 401(k) plan that is top-heavy and provides for “split eligibility" (safe harbor contributions are made only to the “upper group" (participants who have attained age 21 and have completed one year of service) and not to the “lower group" (participants with less than one year of service and under age 21)) provide a top-heavy minimum allocation to the lower group's non-key participants employed on the last day of the plan year?

IRS response:

If the safe harbor contribution is not provided to ALL eligible NHCs then the entire plan is subject to the top heavy rules. So if the plan is top heavy, all non-key employees must get the top heavy minimum allocation, not just the NHCs whoa re in the "lower group." However, the safe harbor contribution provided to the "upper group" is counted toward determining if the top heavy minimum contribution liability is satisfied.

Kevin C - it seems that we agree then. This Q&A doesn't say the TH exemption is blown if some HCE non-keys are not getting SH.

I'd like to see another post from the toolkit.

But it specifically says "...if the plan is top heavy, all non-key employees must get the top heavy minimum allocation, not just the NHCs...". Wouldn't that include non-key HCEs?

[John Feldt ERPA CPC QPA]

If the plan has split eligibility and some NHCEs do not get SH, then the entire TH exemption is blown. When the TH exemption is blown, then yes, all non-keys must get the TH min including those under 21/1.

But does it say the TH exemption is blown if some non-key HCEs are not getting a SH allocation?

[Tom Poje]

if the plan is a 3% shnec, how is it possible some NHCEs are not getting the safe harbor?

if it's a safe harbor match, then I suppose you could say some non key NHCEs are not getting the SH allocation, but they could have if they deferred, so it is not a problem.

[BG5150]

if the plan is a 3% shnec, how is it possible some NHCEs are not getting the safe harbor?

You could have immediate eligibility for 401(k), but a year wait for the SH.