Safe Harbor Plan and Excluded Compensation

[John Feldt ERPA CPC QPA]

Employer has 1 HCE (the owner) and 75 eligible NHCEs. Wants to adopt a 3% safe harbor 401(k) plan.

Owner's compensation is normally paid as $120,000 base pay and $150,000 year-end bonus.

The NHCEs receive tips amounting to about 50% of their compensation.

If the plan excludes bonuses and tips for purposes of all allocations, would this still retain its safe harbor status?

If so, it seems like the employer is getting away with a safe harbor contribution of only 1.5% of compensation. We understand that it might eventually become top heavy with all the turnover they have, but that could take several years.

[buckaroo]

My recollection is that you can exclude elements of compensation if you can pass the 414(s) comp ratio testing and you would still retain your safe harbor status. If you cannot pass the testing, then that is where things get more complicated.