Failing Testing Every Year?

[khn]

We work with a plan that has very low NHCE participation and is currently safe harbor. They are making safe harbor contributions for a large number of employees, and want to see if there is any cheaper way to go. They want to remove the safe harbor provision and just fail and process refunds each year. We've told them that failing is technically an operational error, but their point is if they correct it by processing refunds why can't they go that way? I should mention they have zero interest in plan health or participant retirement readiness, they basically only offer a 401k in order to attract employees.

[Lou S.]

We've had plans that make refunds every year. As long as you process the refunds timely there are zero plan compliance issues with making refunds.

[Flyboyjohn]

Would switching from the non-elective to the match safe harbor solve the problem or are they concerned about the NHCEs suddening deferring?

If they insist on dropping safe harbor how about using prior year testing and proactively limiting HCE deferral rates to avoid/eliminate refunds?

[austin3515]

We've told them that failing is technically an operational error, but their point is if they correct it by processing refunds why can't they go that way?

I don't think Lou S. was emphatic enough. This is a very very very incorrect statement.

Also, make sure the plan is not top-heavy before you do away with the safe harbor. (I presume you have safe harbor match already). IF the owners have been socking away the max for 15 years and you have high turnover among lower paid employees, I could easily see where your plan could be top-heavy.