Amend Plan to exclude certain employees

[TPA Bob]

We have an existing 401(k) safe harbor plan with one year of service, age 21, quarterly entry dates.  Plan Sponsor now wants to exclude certain employees from the Plan (a division of the Plan Sponsor) that would make current participants ineligible for the Plan.  The Plan will easily pass coverage.  

I am sure that this can be done but have a colleague that says these employees will continue to be eligible even if now in an excluded class.

Any thoughts greatly appreciated.

[Kevin C]

You can't do that mid-year.  See Notice 2016-16, Section III D 2.

Under prohibited mid-year amendments, it lists:

Quote

2. A mid-year change to reduce the number or otherwise narrow the group of employees eligible to receive safe harbor contributions. This prohibition does not apply to an otherwise permissible change under eligibility service crediting rules or entry date rules made with respect to employees who are not already eligible (as of the date the change is either made effective or is adopted) to receive safe harbor contributions under the plan.

 

[TPA Bob]

Thanks Kevin.  But we could as of January 1, 2018?

 

[Belgarath]

Yes,

[CuseFan]

Agreed, amend eff 1/1/18 to exclude those employees from the definition of eligible employee, no problem, but you need to do so prior to 1/1 and also notify the affected employees in advance, in accordance with ERISA 204(h), either 45 or 15 days prior to 1/1/18 depending on whether the plan is over or under 100 participants.

[Belgarath]

Advance notice, yes, but 204(h) doesn't apply to PS plans. So you only have the safe harbor advance notification period to worry about,

[401_noob]

I thought that ERISA 204(h) only applied to Pension Plans. 

[401_noob]

well Belgarath answered my question as i was typing...

[acm_acm]

Whether 204(h) applies or not, doesn't it make sense that you would tell the affected parties?  I would be interested in the communication strategy for telling the affected parties (likely) a year later when the don't get a PS contribution that they had been excluded, but were only being told after the fact.

[Belgarath]

There's often a big difference between what you MUST do and what you perhaps SHOULD do. So it may be good business practice or employee relations or whatever you want to call it to notify employees sooner rather than later. But the exclusion you describe should be covered in the safe harbor notice, which is given in advance of 2018 anyway. If you think it is necessary to notify them prior to that, that's an employer/HR decision, and I have no opinion - each employer looks at it differently. Some want to notify them immediately - others want to wait as long as possible. The SMM deadline isn't until way into 2018, so the Safe Harbor notice will be the first required notification.