SH Plan Eligibility- Excluding EEs in Controlled Group

[kshawbenefits]

Can a safe harbor plan exclude the employees of one member of a controlled group? Can the plan be separated into SH and non-SH?

[Tom Poje]

my understand is no, if you only have one plan, any NHCE eligible to defer is suppose to be able to get the safe harbor, so I guess if you exclude them entirely then you could do it. otherwise, for example this group could consist of nothing but HCEs deferring the max and a handful of NHCEs yet still get a free ride of ADP testing. 

If you have a separate plan for them then of course they could be non safe harbor, but you can't aggregate for coverage testing

[kshawbenefits]

The group that would be excluded would be excluded for all purposes including deferrals. 

[Kevin C]

 

7 minutes ago, kshawbenefits said:

The group that would be excluded would be excluded for all purposes including deferrals. 

If the plan passes 410(b) with them excluded, you can do it. 

Within the same "plan" (as defined in 1.401(k)-1(b)(4)), a SH plan can't exclude any of the NHCEs from the SH contribution.  See 1.401(k)-3(b) & (c). 

[kshawbenefits]

 

39 minutes ago, Kevin C said:

Within the same "plan" (as defined in 1.401(k)-1(b)(4)), a SH plan can't exclude any of the NHCEs from the SH contribution.  See 1.401(k)-3(b) & (c). 

 I am assuming that you mean the SH 3% contribution, not the match. 

[Kevin C]

No, both the 3% and the SH match have the same requirement.

Quote

1.401(k)-3(b) Safe harbor nonelective contribution requirement—(1) General rule. The safe harbor nonelective contribution requirement of this paragraph is satisfied if, under the terms of the plan, the employer is required to make a qualified nonelective contribution on behalf of each eligible NHCE equal to at least 3% of the employee's safe harbor compensation.

Quote

1.401(k)-3(c) Safe harbor matching contribution requirement—(1) In general. The safe harbor matching contribution requirement of this paragraph (c) is satisfied if, under the plan, qualified matching contributions are made on behalf of each eligible NHCE in an amount determined under the basic matching formula of section 401(k)(12)(B)(i)(I), as described in paragraph (c)(2) of this section, or under an enhanced matching formula of section 401(k)(12)(B)(i)(II), as described in paragraph (c)(3) of this section.

If you are thinking about the SH match for NHCEs who don't defer, they must be eligible for it, but their match under the SH formula is $0.

[kshawbenefits]

Now I am sort of answering my own question, but after looking at the regs cited above, wouldn't I actually be looking to Reg. §1.401(k)-3(c)(6)(i) to answer the question of whether the employees of a specific division can be excluded from a safe harbor plan?

[Kevin C]

I'm glad you are looking at the cites. 

1.401(k)-3)(c)(6) deals with putting restrictions on deferrals of eligible NHCEs.  You are asking about excluding them from the plan, so they would not be eligible employees.  -3(c)(6) would prevent you from making that division eligible to defer, but putting a low or $0 limit on how much they can defer.  But, that's not what we are discussing.

-3(c)(1) that I quoted says that if you want to satisfy the safe harbor match requirement, it has to be made for all eligible NHCEs in the plan. So, if you allow the division to defer in the plan, but don't give them the SH contribution, you don't meet the SH requirements.  If they are excluded from the plan, they are not eligible NHCEs.

[kshawbenefits]

That's what I thought. I think the answer to my question is in -3(c)(6). The client wants to exclude the division entirely while retaining SH status for the parent company plan. My conclusion is that it's a no go for retaining SH status; have to determine if they can pass testing while excluding the division. 

Thank you for your help!

[Kevin C]

I don't think we are on the same page.  The parent company plan can provide that one division is completely excluded from the plan and still be safe harbor.  However, if the plan doesn't pass 410(b), there are other problems.

Good luck and TGIF