SHNEC, Top Heavy and Otherwise Excludable EE's

[LMD1]

Plan has immediate eligibility for salary deferrals, but has a 1 year of service for Safe harbor non-elective.  No other contributions in Plan.  Assets are greater than 60% for Key EE's.  I know plan is subject to ADP testing for the otherwise excludable group.  My question is:  Does the deemed not-top heavy rule apply to those with less than 1 year of service and who are not eligible for the SHNEC?  Or, are they required to receive a top-heavy minimum?

[Tom Poje]

the Code 416(g)(4)(H) indicates the term 'top-heavy' shall not include a plan that consists solely of a safe harbor arrangement

since a portion of the plan (otherwise excludable) is not safe harbor the whole plan must satisfy top heavy. for top heavy you have 'one' plan even though for other purposes you split the plan into 2.

 

[QP_Guy]

Tom do you happen to have a good cite for this position?  (surprised me a bit...i wouldn't have thought the restructured plan was a separate plan for SH purposes...)

[Luke Bailey]

I took a quick look at the 416 regulations and don't see where "plan" is defined in them. However, there is also nothing in them that would allow you to use the restructuring rules under the 410(b) regulations in determining the boundaries of a top-heavy plan, and therefore the 414(l)/1.414(l)-1(b)(1) definition of a plan (basically, the trust), presumably applies, before you apply the mandatory and permissive aggregation rules under 416 and the 416 regs.

[Doc Ument]

The disaggregation of otherwise-excludable employees is not a "restructuring" provision, it is a "disaggregation" provision.  Restructuring is prohibited by Regulation 1.401(k)-1(b)(4)(iv)((B).  Disaggregation is permitted by 1.401(k)-1(b)(4)(iv)(A).

 

Regulation 1.401(k)-3 requires that the safe harbor contribution be made for all NHCE "eligible employees," which is defined by 1.401(k)-6 as being all (NHCE) participants "eligible to defer."  If you disaggregate otherwise excludable employees, then the plan does not consist solely of deferrals and ADP and ACP safe harbor contributions, i.e., the plan will also consist of ADP-tested contributions (for the disaggregated otherwise excludable employees), and the exemption described by IRC 416 fails.  In other words, you have NHCE participants who are eligible to defer who do not fall within the ADP safe harbor, thus causing the top heavy exemptions to fail.   That also means you could end up with an owner in the ADP-tested group (the owner's spouse is hired midyear), and need to make corrective contributions or corrective distributions to one or more HCEs for a failed ADP test for your so-called "safe harbor" plan.

 

Code Section 416 does not recognize 410(b) components plans.  Only 401(k) does.

 

1.401(k)-3(h)(3) Early Participation Rules.

"Section 401(k)(3)(F) and §1.401(k)-2(a)(1)(iii)(A), which provide an alternative nondiscrimination rule for certain plans that provide for early participation, do not apply for purposes of section 401(k)(12), section 401(k)(13), and this section. Thus, a plan is not treated as satisfying this section with respect to the eligible employees who have not completed the minimum age and service requirements of section 410(a)(1)(A) unless the plan satisfies the requirements of this section with respect to such eligible employees. However, a plan is permitted to apply the rules of section 410(b)(4)(B) to treat the plan as two separate plans for purposes of section 410(b) and apply the safe harbor requirements of this section to one plan and apply the requirements of Section 1.401(k)-2 to the other plan. See Section 1.401(k)-1(b)(4)(vi), Example 2."

[Kevin C]

1 hour ago, QP_Guy said:

Tom do you happen to have a good cite for this position?  (surprised me a bit...i wouldn't have thought the restructured plan was a separate plan for SH purposes...)

Rev. Ruling 2004-13, Situation 4 for the loss of the TH exemption if eligibility for deferrals is earlier than the eligibility for the SH.

1.401(k)-3(h)(3) for being able to have the SH not apply to the otherwise excludable portion of the plan.

[QP_Guy]

@Doc Ument thanks for reminding me i use those two terms incorrectly often.

@ Kevin Very helpful.  I somehow thought the general "anything you can do with two plans you can do with one" rule of thumb applied here.   I guess this is a spot where a separate plan for new hires excluding Keys would be appropriate if the SH plan is top heavy.