Plan design question: Limited HCE eligibility

[Santo Gold]

We are drafting a new 401k plan for 2019, non-safe harbor.  200+ expected eligible participants.  Initially the plan was to be written excluding HCEs (HCEs would have their own nonqualified Deferred Comp program).   

The question was now asked can we let the HCEs into this plan so that they can rollover any 401(k) accounts from previous employer (presumably unrelated) 401k plans, but not have the HCEs eligible to make 401k contributions or receive any employer match (only 2 money types, other than rollover, allowed in the plan).  Does this sound acceptable?  This would only affect HCEs so discrimination issues would not seem to matter.

Thanks for any replies.

[CuseFan]

Maybe, but check your plan document options if you are using a pre-approved plan. Rollovers are usually limited to either participants or eligible employees - that is, employees who have not yet satisfied age and service but would become participants upon doing so. For example, if you excluded union employees from a non-union plan, you wouldn't allow them to roll into the plan would you?

Why exclude HCEs from the Plan? Testing? Plans can limit HCE deferrals up front for testing purposes, or maybe even provide for a hard coded HCE deferral ceiling like 2%. Cost? Exclude them from the match. But they are participants and can roll over if desired.

On the flip side, if I'm an HCE and precluded from otherwise participating in a plan, why would I want to rollover into that plan instead of an IRA unless it has a primo lineup of top performing low cost institutional funds?

[Larry Starr]

Simple answer: yes, it is legal.  The plan admin firm has to confirm that the plan document allows for it or amend it appropriately.  As CuseFan noted, the real question is why would these HCEs want to roll over to this plan versus their own IRA which they would be in full control of?

[Lou S.]

@cuse and @larry - the only reason I can see someone wanting to roll in in that situation is the ability to take a participant loan

[Larry Starr]

On 12/4/2018 at 5:19 PM, Lou S. said:

@cuse and @larry - the only reason I can see someone wanting to roll in in that situation is the ability to take a participant loan

Understood; but since the VAST MAJORITY (95% is probably an understatement) of our plans don't allow loans, not an advantage for our clients. Want a loan?  Go to the bank! :-)