Safe harbor match - eligibility

[Retirement Geek]

Ongoing debate regarding whether a safe harbor 401(k) plan can impose different eligibility requirements for deferrals than for match.  Opinions please!

[Kevin C]

This came up in a recent discussion.  For having deferral eligibility be earlier than safe harbor match eligibility, here is the cite:

Quote

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 §1.401(k)-2 to the other plan. See §1.401(k)-1(b)(4)(vi), Example 2.

If you are asking about imposing allocation conditions on the SHM, doing that would cause a violation of this:

Quote

1.401(k)-3(c)(4) Limitation on HCE matching contributions. The safe harbor matching contribution requirement of this paragraph (c) is not satisfied if the ratio of matching contributions made on account of an HCE's elective contributions under the cash or deferred arrangement for a plan year to those elective contributions is greater than the ratio of matching contributions to elective contributions that would apply with respect to any eligible NHCE with elective contributions at the same percentage of safe harbor compensation.

 

[Mr Bagwell]

Kevin provided the proof that it can have different eligibility requirements.

For conjecture, I don't like dual eligibility for safe harbor plans.  It just takes away the "that was easy" plan button.  Instead of having a single entry date, I have to chase after and watch the safe harbor entry date.  And then instead of not having an ADP test, and maybe an ACP test, I have to possibly run them both.  Give me a single entry safe harbor plan all day long!

I understand the employers want the employees to have the ability to defer sooner than the safe harbor. But the employer typically thinks the plan won't have any ADP test failures.

Get this.  I had a dual eligibility safe harbor plan add the two owners wives as employees.  Of course, they maxed out at a 66% ADP.  Needless to say the refunds are large and 2018 had losses.   Ouch.  Contributions are submitted via DVC and we were not given a heads-up.  (not that we expected one)  Clearly, I would have had the two wives just take the salary for 2018 and start the loading up in 2019 when they get the safe harbor match.

It would be pretty rare to have an HCE hit in the first year of employment, but it can happen.

[JRN]

Be careful with dual eligibility if the Plan is top-heavy. You'll have to make the top-heavy contribution for the employees who are eligible to make 401(k) deferrals,notwithstanding that they are not yet eligible for match.

[Doc Ument]

No, you cannot impose a separate age and service requirement for ADP safe harbor contributions (different than for deferrals), you can only use the 410(b) disaggregation rules, which is not the same as "eligibility" (which is why most preapproved plans will refer you to an exclusion (i.e., disaggregation) of otherwise excludable employees, rather than offering separate age and service requirements). The 410(b) component plan that is comprised of those under age 21 and 1 year of service MUST be ADP-tested, and for that reason, no such plan will qualify for the top heavy exemption, since the plan as a whole does not consist entirely of an ADP safe harbor (even if there are no HCEs in the ADP-tested group). If there is an HCE in the ADP-tested disaggregated group (such as an owner who is under age 21&1), and the ADP test for that disaggregated group fails, then you will need to make corrective contributions or corrective distributions for that disaggregated group, even though the employer calls it a "safe harbor" plan. And, if you choose to make safe harbor contributions for those with six months of service, for example, then you will have a group of participants who are receiving ADP safe harbor contributions but who are nonetheless in the ADP-tested 410(b) component plan. In summary, disaggregating otherwise excludable employees is not the same thing as having an "eligibility" requirement of six months, or one year of service, for ADP SH contributions. All of the above would also apply even if only the age requirement was different for ADP SH than for deferrals.

 

See:

 

Revenue Ruling 2004-13

 

and

 

https://benefitslink.com/boards/index.php?/topic/63746-shnec-top-heavy-and-otherwise-excludable-ees/&tab=comments#comment-290008

[Kevin C]

18 hours ago, Doc Ument said:

No, you cannot impose a separate age and service requirement for ADP safe harbor contributions (different than for deferrals), you can only use the 410(b) disaggregation rules, which is not the same as "eligibility" (which is why most preapproved plans will refer you to an exclusion (i.e., disaggregation) of otherwise excludable employees, rather than offering separate age and service requirements). The 410(b) component plan that is comprised of those under age 21 and 1 year of service MUST be ADP-tested, and for that reason, no such plan will qualify for the top heavy exemption, since the plan as a whole does not consist entirely of an ADP safe harbor (even if there are no HCEs in the ADP-tested group). If there is an HCE in the ADP-tested disaggregated group (such as an owner who is under age 21&1), and the ADP test for that disaggregated group fails, then you will need to make corrective contributions or corrective distributions for that disaggregated group, even though the employer calls it a "safe harbor" plan. And, if you choose to make safe harbor contributions for those with six months of service, for example, then you will have a group of participants who are receiving ADP safe harbor contributions but who are nonetheless in the ADP-tested 410(b) component plan. In summary, disaggregating otherwise excludable employees is not the same thing as having an "eligibility" requirement of six months, or one year of service, for ADP SH contributions. All of the above would also apply even if only the age requirement was different for ADP SH than for deferrals.

 

See:

 

Revenue Ruling 2004-13

 

and

 

https://benefitslink.com/boards/index.php?/topic/63746-shnec-top-heavy-and-otherwise-excludable-ees/&tab=comments#comment-290008

Not sure I follow what you are trying to say. 

Our VS document allows different eligibility requirements for safe harbor contributions than those used for salary deferrals.  The only restrictions on eligibility for the safe harbor are that it can't be later than 21&1, semi annual entry  and it can't be discriminatory.  If you do so, the document requires disaggregation of otherwise excludables for testing.  So, yes, it can be done, even in a pre-approved document.

As you note, using different eligibility requirements does result in the otherwise excludable portion of the plan not being safe harbor because  all of the NHCEs eligible to defer are not eligible for the safe harbor. So, for example, if a plan has immediate eligibility for deferrals and 6 months eligibility for the safe harbor contribution, the otherwise excludable portion of the plan would be subject to ADP/ACP testing even though some of the participants in that portion of the plan receive the safe harbor contribution.  It's also been noted that the entire plan does not qualify for the TH exemption.

Plan sponsors may have reasons other than testing for wanting to give some, but not all, of those with less than a year of service the safe harbor contribution.

 

 

[Retirement Geek]

On 2/6/2019 at 4:36 PM, Kevin C said:

This came up in a recent discussion.  For having deferral eligibility be earlier than safe harbor match eligibility, here is the cite:

If you are asking about imposing allocation conditions on the SHM, doing that would cause a violation of this:

 

Very helpful - thank you!

[Retirement Geek]

Thanks all for the input.  To play it safe we will stick with single eligibility.  I don't like gray areas when it comes to plan compliance!

[Doc Ument]

On ‎2‎/‎12‎/‎2019 at 10:34 AM, Kevin C said:

Not sure I follow what you are trying to say. 

Our VS document allows different eligibility requirements for safe harbor contributions than those used for salary deferrals.  The only restrictions on eligibility for the safe harbor are that it can't be later than 21&1, semi annual entry  and it can't be discriminatory.  If you do so, the document requires disaggregation of otherwise excludables for testing.  So, yes, it can be done, even in a pre-approved document.

As you note, using different eligibility requirements does result in the otherwise excludable portion of the plan not being safe harbor because  all of the NHCEs eligible to defer are not eligible for the safe harbor. So, for example, if a plan has immediate eligibility for deferrals and 6 months eligibility for the safe harbor contribution, the otherwise excludable portion of the plan would be subject to ADP/ACP testing even though some of the participants in that portion of the plan receive the safe harbor contribution.  It's also been noted that the entire plan does not qualify for the TH exemption.

Plan sponsors may have reasons other than testing for wanting to give some, but not all, of those with less than a year of service the safe harbor contribution.

 

 

A drafter can specify different eligibility requirements for profit sharing contributions than for deferrals. That is because there is no regulation stating anyone eligible to defer must receive the profit sharing contribution. Contrast that to the existence of the requirement in 1.401(k)-3 that all NHCE "eligible employees" must receive the ADP SH contribution, and the definition of "eligible employee" in 1.401(k)-6 that states that an "eligible employee" is someone eligible to defer.

Is the drafter of that preapproved document on notice that there is a GENERAL requirement that eligibility for the safe harbor must be the same as for deferrals UNLESS the rules set forth in the BPD regarding 410(b) disaggregation are followed (with the consequent likely loss of the safe harbor exemption)? If so, I have no objection. Otherwise, I would have made it much harder for the drafter to mistakenly conclude that having different eligibility for safe harbor contributions than for deferrals is no different than having different eligibility conditions for profit sharing contributions than for deferrals. If the employer doesn't know that they have essentially elected to use the disaggregation rules when they elect different eligibility conditions for the safe harbor contributions, they may end up with a serious potential qualification defect because of a regulation that is unique to safe harbor contributions.

I will revise my previous post to say:  In the absence of 410(b) disaggregation of otherwise excludable employees, eligibility for safe harbor contributions must be the same as for deferrals, at least for NHCEs.