Sponsoring a SEP and 401(k)

[austin3515]

Client has 4 employees plus himself as the owner. All employees were hired in 2014. The owner started the business 6 years ago.

Can he establish a safe harbor 401k for the employees and continue to contribute the max to the SEP ($52,000) without including any of his employees until

2017 (2014, 2015, 2016 for service = 2017 eligibility in the SEP)? The document does use the "3 of 5 rule."

I know that we can no longer use the 5305 and I also know that I need to be concerned with top-heavy (hence the safe harbor status of the plan).

I know about 415 aggregation, etc., but I cannot find anything on this, which is surprising because I would think this is a pretty obvious plan design choice in the right circumstances.,

[ETA Consulting LLC]

It should be tested the same way as if the profit sharing had a two year eligibility. Let's assume (for argument sake) the safe harbor is a match (with 21 & 1) and the plan included a Profit Sharing with a two year eligibility. As long as you account for 415 and Top Heavy, you should be fine.

Keep in mind that the SEP states that if the employee performs ANY service (i.e. at least an hour) during the year, then he gets credited for that year when counting the 3 out of 5.

With that said, there may be a mathematical possibility where the owner may choose to use the SEP for the (service during any three of the preceding 5 years) in order to get a free ride on that portion. It's like you stated, "under the right circumstances".

Edited: I'm not implying that the SEP is subject to testing, but merely making a reference to the use of the extended eligibility.

Good Luck!