May a safe-harbor 401(k) plan omit loans, hardships, and before-retirement distributions?

[Peter Gulia]

Imagine an employer wants a safe-harbor plan's relief from the ADP test, but seeks to design the plan so that some employees will choose not to make elective contributions. To do so, the plan precludes participant loans, precludes hardship distributions, and does not provide any distribution until a participant's death or latest commencement date permitted under ERISA 206(a). (The employer's owner would not be troubled by these restrictions because she does not anticipate a need to use her plan account until her age 70.)

Assuming the plan, the employer, and the administrator meet other safe-harbor conditions, including all notice requirements, does anything about the restrictive plan provisions cause the plan to lose safe-harbor relief?

[Lou S.]

No. You can do that. Kind of an a-hole move and says a lot about the employer, but nothing illegal about it.

[Kevin C]

Most of the new safe harbor plans we set up do not allow loans or hardships. We don't have any SH plans that delay distribution of deferrals until death or retirement age. But, we do have one SH 401(k) that doesn't distribute the employer contribution accounts until retirement age, death or disability.

I agree it can be done, but would recommend that the employer make the extra effort to get a signed zero deferral election from everyone who does not want to defer, or at least keep a log of when each person was given their enrollment forms. With little participation from NHCEs, I would expect that if audited, the DOL or IRS will want to see documentation showing that the NHCEs were really offered the opportunity to defer.

Depending on the size of the employer and turnover, delaying distributions until death or retirement age could eventually backfire on them. Those vested terms will increase the participant count and get them closer to large plan filings and an audit.

[Peter Gulia]

Thank you both for the good help.

For reasons somewhat aligned with Lou S.'s observation, I had already decided not to accept the employer as my client. But an investment adviser who, following my no-thank-you, will take on a plan-documents task is a friend, and I'm willing to help him think through the issues.

Kevin C., your thought about how delaying distributions affects a participant count is useful.

[Flyboyjohn]

Is the plan design the "triple stack match" (safe harbor, fixed and discretionary matches) so the owner(s) can get the $53,000/$59,000 max?

We impolitely refer to this plan design as either the "Greedy Doctor" or "Ebenezer Scrooge" plan and have used it several times with those types of clients.

The financial advisors hate it since it usually results in just the owner/doctor having an account balance.