Dual Eligibility and Testing Requirements?

[JMP]

My client is setting up a safe harbor 401(k) plan with a SH matching contribution and wants to implement dual eligibility, that is, allow participants to defer immediately into the plan but require one year of service in order to receive the match? Is there any concern in having dual eligibility?”    How would you test these dual eligibility groups each year?  What complications would you see in implementing a plan like this?

[C. B. Zeller]

The major thing you need to be aware of with using different eligibility for deferrals and safe harbor match, is that you no longer get your free pass for top heavy. If the plan ever becomes top heavy, you will be subject to the top heavy minimum, even if the only other employer contribution for the year is the safe harbor match.

Other than that, there is no problem with having different eligibility requirements for deferral and match. For the ADP test, the employees who have not completed 1 year of service are disaggregated as otherwise excludable, and as long as they are all NHCE that group does not need to be tested. For the other group they satisfy the ADP/ACP test by way of the safe harbor match.

[Mr Bagwell]

I don't like dual eligibility safe harbor plans.  Just stating my bias up front. 

With that said, the pitfalls are:  1.  will the plan become top heavy?  If so, the group eligible to defer but no SHM will need a Top Heavy Minimum.  Be prepared at some point to explain this concept to the employer and have them be some form of upset.  2.  You have to watch for employee(s) that become immediate HCE's.  It's not likely, but it does happen.  Of course, this HCE will max out and ADP will have huge failure.  Be prepared to explain this and have them be some form of upset. 

The groups should be not be a big deal to test.  Generically speaking, separate testing should solve the questions in your mind.  You would have in essence,  the safe harbor group and the non safe harbor group.

The distain I have for the safe harbor dual eligibility comes from the simplicity of a single entry safe harbor plan vs. the many checks I have to do with the dual eligibility version.   Please don't think the dual design is easier to administer than a non safe harbor plan.  It is not.

Now go sell them on a 6 months single eligibility, participating compensation, safe harbor match plan.  Of course the dual eligible plan should cost more than the single.

My two cents.

 

 

[Larry Starr]

1 hour ago, Mr Bagwell said:

I don't like dual eligibility safe harbor plans.  Just stating my bias up front. 

With that said, the pitfalls are:  1.  will the plan become top heavy?  If so, the group eligible to defer but no SHM will need a Top Heavy Minimum.  Be prepared at some point to explain this concept to the employer and have them be some form of upset.  2.  You have to watch for employee(s) that become immediate HCE's.  It's not likely, but it does happen.  Of course, this HCE will max out and ADP will have huge failure.  Be prepared to explain this and have them be some form of upset. 

The groups should be not be a big deal to test.  Generically speaking, separate testing should solve the questions in your mind.  You would have in essence,  the safe harbor group and the non safe harbor group.

The distain I have for the safe harbor dual eligibility comes from the simplicity of a single entry safe harbor plan vs. the many checks I have to do with the dual eligibility version.   Please don't think the dual design is easier to administer than a non safe harbor plan.  It is not.

Now go sell them on a 6 months single eligibility, participating compensation, safe harbor match plan.  Of course the dual eligible plan should cost more than the single.

My two cents.

 

 

While I agree that I also do not like split eligibility, I disagree that 6 months for everyone is the answer. I suggest one year for everyone is the answer because split eligibility can give some serious unintended results.  I don't like six months because then you CAN'T require a year of service and every part time employee who works 1 hour a week will enter the plan. That's a bigger PIA than split eligibility.

If you don't have a subscription to the Erisa Outline Book (from ASPPA), you need to get it. If you do have it, read up on "otherwise excludable" for all your answers on testing.

[Mr Bagwell]

I'm guessing we are on the same page, Larry.  I would do 1 year wait all day long.

I only suggested 6 months in this case because maybe it would be a happy medium for the dual eligibility ask.  Maybe the employer would say, 'I can live with telling an employee to wait 6 months and be willing to kick in the safe harbor after 6 months".   After all, the employer was willing to do immediate eligibility for deferrals, which would probably involve everyone.

Rock on.

[Mike Preston]

46 minutes ago, Larry Starr said:

While I agree that I also do not like split eligibility, I disagree that 6 months for everyone is the answer. I suggest one year for everyone is the answer because split eligibility can give some serious unintended results.  I don't like six months because then you CAN'T require a year of service and every part time employee who works 1 hour a week will enter the plan. That's a bigger PIA than split eligibility.

If you don't have a subscription to the Erisa Outline Book (from ASPPA), you need to get it. If you do have it, read up on "otherwise excludable" for all your answers on testing.

I'm aware of the counter-argument, but many volume submitter documents allow a restriction of 6 months where hours exceed 83 in each month.  So one can get close to excluding those who might otherwise be excluded in a 12 month/1000 hour eligibility.

[Larry Starr]

3 hours ago, Mr Bagwell said:

I'm guessing we are on the same page, Larry.  I would do 1 year wait all day long.

I only suggested 6 months in this case because maybe it would be a happy medium for the dual eligibility ask.  Maybe the employer would say, 'I can live with telling an employee to wait 6 months and be willing to kick in the safe harbor after 6 months".   After all, the employer was willing to do immediate eligibility for deferrals, which would probably involve everyone.

Rock on.

I suggest the employer help set up payroll deduction IRAs with their own bank for any new employee who wants to defer before the one year eligibility is met. There is a rule that if an employer has reason to believe that the IRA contribution will be deductible for the employee, he doesn't have to subject that amount to withholding so it operates much like 401(k) deferrals.  Most new employees won't go over the IRA cap anyway.

 

[Mr Bagwell]

That is an interesting twist I have not heard of.....

[Larry Starr]

4 hours ago, Mr Bagwell said:

That is an interesting twist I have not heard of.....

I'm just full of it  them! ?

[Belgarath]

"I suggest the employer help set up payroll deduction IRAs with their own bank for any new employee who wants to defer before the one year eligibility is met. There is a rule that if an employer has reason to believe that the IRA contribution will be deductible for the employee, he doesn't have to subject that amount to withholding so it operates much like 401(k) deferrals.  Most new employees won't go over the IRA cap anyway."

 

Larry, that's very interesting indeed. Do you know, offhand, a citation for that? Please don't take any time, I can dig around when I have a chance.

[Luke Bailey]

The separate testing requirement pointed out by Mr. Bagwell in his first post is in Treas. reg. 1.401(k)-3(h)(3). Look at that and follow the cites to the 1.401(k)-1 and -2 regs and example. The preapproved plans I have reviewed for this have all included the rule in detail, parroting the regs.

[Larry Starr]

15 hours ago, Belgarath said:

"I suggest the employer help set up payroll deduction IRAs with their own bank for any new employee who wants to defer before the one year eligibility is met. There is a rule that if an employer has reason to believe that the IRA contribution will be deductible for the employee, he doesn't have to subject that amount to withholding so it operates much like 401(k) deferrals.  Most new employees won't go over the IRA cap anyway."

 

Larry, that's very interesting indeed. Do you know, offhand, a citation for that? Please don't take any time, I can dig around when I have a chance.

I wrote about this idea many years ago in an article for The Journal of Pension Benefits.  When I'm in the office (will be there tomorrow; sheesh!) I'll try to remember to find the article. I think I referenced the cite in the article.

[RatherBeGolfing]

13 hours ago, Larry Starr said:

I wrote about this idea many years ago in an article for The Journal of Pension Benefits.  When I'm in the office (will be there tomorrow; sheesh!) I'll try to remember to find the article. I think I referenced the cite in the article.

Just as an FYI for everyone, your county library probably has JPB available as part of its extended electronic only research library, so a library card will let you read many of the back issues of JPB.  I think they are about a year to 18 months behind so you wont be able to read the most current ones but for articles with a few years on them it is awesome. I use it all the time when I want more context on an older rev proc or regulation.

  For example, if you wanted to read commentary on KETRA/Notice 2005-92, or RMDs under WRERA/Notice 2009-82, you could probably find some good articles.

[Larry Starr]

On 4/25/2020 at 12:14 PM, RatherBeGolfing said:

Just as an FYI for everyone, your county library probably has JPB available as part of its extended electronic only research library, so a library card will let you read many of the back issues of JPB.  I think they are about a year to 18 months behind so you wont be able to read the most current ones but for articles with a few years on them it is awesome. I use it all the time when I want more context on an older rev proc or regulation.

  For example, if you wanted to read commentary on KETRA/Notice 2005-92, or RMDs under WRERA/Notice 2009-82, you could probably find some good articles.

If you have the ability to search the JPB, I think the article was titled "The Poor Man's 401(k)  Plan" (I think). Look under my byline and see if something like that shows up.  I didn't have time to check today, but I will look tomorrow.

[MWeddell]

For larger plans, requiring a year of service before one is eligible for the safe harbor match works fine.  Top-heavy testing, although legally still binding, is seldom a concern for large plans.  Having a 5% owner-employee also is seldom a concern for larger plans.  One must still check annually whether there is an HCE in the otherwise excludable employee group.  Don't get too cute with stretching the one year of service eligibility too far by also including an entry date requirement, which can cause HCEs to slip into the otherwise excludable employee group.

[RatherBeGolfing]

10 hours ago, Larry Starr said:

If you have the ability to search the JPB, I think the article was titled "The Poor Man's 401(k)  Plan" (I think). Look under my byline and see if something like that shows up.  I didn't have time to check today, but I will look tomorrow.

Not finding it, but I'm limited to 2001-2018