Cross Testing with 2-Year Eligibility

[ERISAAPPLE]

This is a little complicated, so I will spoon out the facts one by one.

I have a DC plan with a 401(k), 3% safe harbor QNEC, and new comparability PS - one participant per group.   The plan year is the calendar year.  The plan is top-heavy.  The 3% safe harbor excludes pre-participation comp.

Eligibility for 401(k) is one year (1000 hours) with semi-annual entry dates (Jan. and Jul.)

Eligibility for profit sharing is 2 years (1000 hour each year).  Also semi-annual entry dates.

I am testing for 2017.  One NHCE (let's call her Employee A) entered the 401(k) on 01/01/2017.  Employee A did not have 2 years in 2017 and thus is not eligible for the PS. 

Another NHCE (Employee B) entered the 401(k) on 07/01/17.  Employee B also did not have 2 years in 2017 and thus is not eligible for the PS.

My understanding is Employee A is required to get the gateway, with the 3% SH QNEC counting towards that.

Employee B only gets a safe harbor of 3% of comp. from 7/1 to 12/31, so he also has to get a top heavy for the whole year (his safe harbor on his half-year of comp. counts towards the top-heavy).  The 3% safe harbor plus the top-heavy satisfy B's gateway requirement.

The question is whether I include either or both of Employee A and B in the numerator or denominator, or both, when doing the rate group testing.   In other words, when I test the rate groups, how do I treat Employee A and B?  Are they totally excluded because they are not eligible for the PS? 

 

 

 

[ETA Consulting LLC]

When you're eligible for a 3% Safe Harbor Nonelective Contribution after 1 year, then you're eligible for a Nonelective after 1 year.  The Nonelective that you're eligible for is used to meet the safe harbor 401(k), but it's still a Nonelective.  Given this, it should be tested with any other nonelective received; despite the different (e.g. 2 Year) eligibility.

Good Luck!

 

[ERISAAPPLE]

Thank you.  To be clear, are you saying the eligibility for the 3% safe harbor means the two employees who are not eligible for the discretionary PS are still included in the rate group testing for the discretionary PS?  That is actually a good answer because we may not pass without these two.  

[ETA Consulting LLC]

1 hour ago, ERISAAPPLE said:

Thank you.  To be clear, are you saying the eligibility for the 3% safe harbor means the two employees who are not eligible for the discretionary PS are still included in the rate group testing for the discretionary PS?  That is actually a good answer because we may not pass without these two.  

Yes.  That's what I'm saying.  Had the Safe Harbor been a match, then you could exclude those employees from the test for failing to meet the Statutory Age/Service (which happens to be 2 years).  But the fact that you have a nonelective with eligibility of only 1 year, then there is no way they would be excluded from the test.  The Safe Harbor QNEC, for all purposes, is still a nonelective contribution; it's just one that can be used to exempt the plan from ADP Testing.

Good Luck

[ERISAAPPLE]

That makes sense.  I suppose if this were not a safe harbor but were a 3% non-elective with a discretionary on top, you would test the two together.  Thank you.

[Tom Poje]

the ERISA Outline has the following

 

Chapter 2 Section VIII 2 B 2

2.Who is an otherwise excludable employee? IRC §410(b)(4)(B) doesn't actually use this term, but the term is illustrative of the category of employees being disaggregated. The statutory language says: "If employees not meeting the minimum age or service requirements of subsection (a)(1) (without regard to subparagraph (B) thereof) are covered under a plan of the employer which meets the requirements of paragraph (1) separately with respect to such employees, such employees may be excluded from consideration in determining whether any plan of the employer meets the requirements of paragraph (1)." Let's parse this language in §410(b)(4)(B).

 

 The employees being disaggregated here are those who do not meet the requirements of IRC §410(a)(1) (i.e., minimum age of 21 and minimum service of one year of service).

The reference to "subparagraph (B)" means that the 2-year eligibility rule cannot be used as the basis for this disaggregation rule. See 3. below.

[ERISAAPPLE]

This was helpful. Thank you.