SH amount owed

[Becky Schwing]

New plan - effective date 01/01/2018

4 employees - Dr. & his spouse & 2 non-related staff members

Allows for EE deferrals, Profit Sharing & SHNE.

SHNE limited to only NHCE's

EE deferral and SHNE component of plan set up with special effective date of 10/01/2018

4 employee all became eligible 07/01/2018 

Compensation is based on full year pay - not date of entry

Only contributions into the plan will be two $18,500 contributions made by the doctor and his spouse and the 3% safe harbor to the two staff members (neither of the two staff members deferred)

When calculating the 3% safe harbor non-elective for the 2018 plan year is the SHNE contribution based on just compensation from 10-01-2018 to 12-31-2018 due to the SH being effective 10/01/2018?  Or should it be on the full year compensation 01/01/2018 to 12/31/2018?  Plan will be top-heavy for 2018 based on the two HCE's deferral but it is a consists solely of plan. 

[Bri]

If the definition of compensation is full year, then the 3% for the staff needs to be for the full year.

If you had used only "while a participant in that component of the plan" then you could have limited it to 3% of the last three months' worth.  And if that were the only contribution, you'd have gotten away with it for top heavy purposes, too.

[chc93]

But... if no one could defer from 1/1/18 to 9/30/18, then we've been told by ERISA attorney that compensation for SHNE can (should?) be based on 10/1/18 to 12/31/18.

[Larry Starr]

1 hour ago, chc93 said:

But... if no one could defer from 1/1/18 to 9/30/18, then we've been told by ERISA attorney that compensation for SHNE can (should?) be based on 10/1/18 to 12/31/18.

Not the first time I've disagreed with an ERISA attorney! ? That interpretation is clearly not required in a normal SH plan adoption on 10/1.  It really does turn on the language in the plan and I would want to read it, but I tend to agree with Bri given the way you have described the document.  Of course, I have no idea why you set up the  EE deferral and SHNE component of plan with a special effective date of 10/01/2018 when you made the plan effective 1/1/18. Why did you do that? What were you attempting to do?  Is there anything in the plan document that, by making the SHNE component effective 10/1, special language limiting the considered comp actually comes into play?  When we set up such a plan, we see no need to have any special effective dates because that is true by definition (employee obviously can't defer BEFORE 10/1 if that is when the plan is actually adopted).   What is the meaning of "making the SHNE component of plan" effective 10/1?

Of course, as long as the plan was adopted by 10/1, it met the SH rules and was a SH plan even though they obviously could not defer until 10/1.  No special effective date was necessary, as far as I can see.  What was the purpose?  I can't imagine we would want to limit the the Doc and spouse comp to only 3% of 3 month's comp, but I could be wrong.  I'm curious as to the additional details as to why this was done. 

[Gadgetfreak]

We also consulted with an attorney and our Document provider with a similar issue. We started a few SH/Profit Sharing plans in September 2019. We made the effective date 1/1/19 so the PS can be based on full year wages. But, since there was no option to defer prior to October, we made deferrals effective 10/1/19. We were told that the SH - whether the 3% SHNE or an SHM - must have the same effective date as deferrals. So the 3% SH was also made effective 10/1/19 and is only based on wages from 10/1-12/31/19. 

[Kevin C]

19 hours ago, chc93 said:

But... if no one could defer from 1/1/18 to 9/30/18, then we've been told by ERISA attorney that compensation for SHNE can (should?) be based on 10/1/18 to 12/31/18.

A plan can be set up using entry date compensation for the safe harbor contribution, but it isn't required.  Our VS document has an option in the safe harbor section that very clearly allows the use of compensation earned while not eligible for the safe harbor contribution when using compensation for the entire plan year. That is something we always discuss with the employer when setting up a new SH plan mid-year and the document will clearly reflect how the employer decides to do it.

As for a special effective date, it would depend on the plan language and the timing.  The default in our VS document is that participants are eligible to defer on the later of the effective date of the plan or the adoption date of the plan.  If the document was adopted 9/10/19, effective 1/1/19 and deferrals were to start 10/1/19, a special effective date of 10/1/19 would be needed.  If deferrals don't start when the document is effective, I use the special effective date section to specify when deferrals start for clarity.

[Larry Starr]

3 hours ago, Kevin C said:

A plan can be set up using entry date compensation for the safe harbor contribution, but it isn't required.  Our VS document has an option in the safe harbor section that very clearly allows the use of compensation earned while not eligible for the safe harbor contribution when using compensation for the entire plan year. That is something we always discuss with the employer when setting up a new SH plan mid-year and the document will clearly reflect how the employer decides to do it.

As for a special effective date, it would depend on the plan language and the timing.  The default in our VS document is that participants are eligible to defer on the later of the effective date of the plan or the adoption date of the plan.  If the document was adopted 9/10/19, effective 1/1/19 and deferrals were to start 10/1/19, a special effective date of 10/1/19 would be needed.  If deferrals don't start when the document is effective, I use the special effective date section to specify when deferrals start for clarity.

Amen!

[Larry Starr]

7 hours ago, Gadgetfreak said:

We also consulted with an attorney and our Document provider with a similar issue. We started a few SH/Profit Sharing plans in September 2019. We made the effective date 1/1/19 so the PS can be based on full year wages. But, since there was no option to defer prior to October, we made deferrals effective 10/1/19. We were told that the SH - whether the 3% SHNE or an SHM - must have the same effective date as deferrals. So the 3% SH was also made effective 10/1/19 and is only based on wages from 10/1-12/31/19. 

The decision to make deferrals effective 10/1/19 was not necessary. See Kevin C's comment above.