safe harbor and top heavy

[pmacduff]

calling Tom Poje - just want to confirm my knowledge of the facts on SH and TH:

If a plan has a more liberal eligibility for 401(k) deferrals (i.e. 6 mos of service) but makes the participants wait 1 year of service for the 3% non elective safe harbor contribution, then the plan in effect loses the top heavy "free ride"....is this accurate?

[Lou S.]

That is accurate.

[Tom Poje]

hope you like the way I threw my voice.

by the way, this info was in Rev Ruling 2004-13, such a plan will satisfy safe harbor but not top heavy.

In Situation 4, under the plan, newly hired nonhighly compensated employees who make elective contributions will not be eligible to receive any matching contributions until they have completed 1 year of service. Since this will result in a greater rate of matching contributions for highly compensated employees than for nonhighly compensated employees, the matching contributions do not satisfy the requirements of § 401(k)(12) (or § 401(m)(11)). Further, since all eligible nonhighly compensated employees under the plan do not receive safe harbor nonelective contributions or safe harbor matching contributions, the matching contributions made under the plan do not satisfy the requirements of § 401(k)(12). However, certain plans that provide for early participation may satisfy the requirements of § 401(k)(12) with respect to the portion of the plan that covers employees who have completed the minimum age and service requirements of § 410(a)(1), while satis fying the ADP test of § 401(k)(3)(A)(ii) for the eligible employees who have not completed the minimum age and service requirements. Unless a plan (within the meaning of § 414(l)) meets the requirements of § 416(g)(4)(H), no portion of the plan will satisfy § 416(g)(4)(H). (See Notice 2000-3, 2000-1 C.B. 413, Q&A-10.)

....

the explanation being:

plan provides a greater match for some HCEs than at least some of the NHCEs

plan does not provide a safe harbor to all NHCEs

both of these items cause the plan to fail safe harbor requirements, but since there is an exception to the safe harbor for early participation you are ok with the safe harbor. however, top heavy rules apply to all participants so...