5 partners in LLC

[thepensionmaven]

Recently took over a safe harbor 401K with 5 partners, no NHCEs, each in his own grouping for allocation purposes. One of the partners wishes to contribute $0 and we were told by the previous TPA that if the partner did not contribute, he is not considered part of the plan and therefore could not have a contribution allocation of $0??

[Nate S]

I wonder if they aren't trying to make the now obsolete point that if one doesn't wish to contribute and is able to elect a $0 allocation, then the Plan allocations are all impermissible CODA's.

Aside from a deferral election and resultant safe harbor if any, and top heavy if to all employees, any discretionary allocation needs to be the election of the Employer.  Doesn't matter if its a partnership, sole-prop, LLC, or fully incorporated entity, it has to read as an entity decision which a resolution helps codify.

[Paul I]

As a side question, why did they have a safe harbor in the first place?  (A plan with all HCEs would pass NDT by default - 1.401(k)-2(a)(i)(B)(ii).)

Nate S is right, the partnership as an entity needs to have formal documentation that the individual contributions are decided and authorized by the partnership.  The documentation preferably will show these actions were taken on or before the date the contribution is funded.

[thepensionmaven]

This was brought up by another TPA.  I believe they were speaking of employer contributions.

I would have put each partner in his own group and had the one that was not contributing, contribute $0

[LMK TPA]

As to why it's a safe harbor plan in the first place, my thought is that it's laying the groundwork for a future employee.  I wrote a plan recently as a 3% non-elective safe harbor plan with HCEs only (at the moment.)  The document allows me to exclude HCEs from the safe harbor allocation so no HCE is obligated to contribute.  If a NHCE is ever hired and eligible, the plan is automatically protected from failing ADP.  If anyone sees this design is a problem, please let me know - I appreciate the feedback and your expertise!

[Paul I]

That works as long as all of the HCEs are key employees and key employees are excluded from getting a top heavy minimum contribution.  Your design could appeal to a plan sponsor that wants to use liberal eligibility requirements.  I have seen more often a plan allowing everyone employed on the effective date to enter immediately upon adoption of the plan, and any new hires after that date are subject to age 21 and 1 YoS (1000 hours or elapsed time) with semiannual entry dates.  This gives the plan some time to react to hiring new employees.

Being able to adopt a SHNEC feature retroactively is also another available tool to use if there is a concern about new hires causing ADP problems.