Safe Habor match issues and Can an HCE really be an NHCE?

[Guest PALAWYER]

Employer sponsors a 401(k) Plan with safe harbor match. There is a six month service requirement. Employer hires an employee in the middle of a year at a salary of 160,000 per year. Employee works 6 months (say july to december)and becomes a participant in the plan- employee only earns 80K first year -is the employee an HCE or NHCE for safe harbor purposes? Also, in the same plan, can you exclude all new hires (HCEs and NHCEs) who do not meet the minumum service requirements under the code from the safe harbor match? In other words create two plans in one- where you need minimum age and service to get the match?

[MR]

I think your $160,000 guy is not only NHC for year 1, but also year 2, assuming we're talking about 2000. He doesn't earn over 85k in 2000, so is NHC in next year unless he becomes an owner. Not sure why it matters if the plan is safe harbor, though.

On the second question, I think you're OK to limit safe harbor match to those with 1 year and age 21.

[Guest Kurt Linsenmayer]

I agree with MR on the NHCEs. Notice 2000-3, 2000-4 I.R.B. 413 (Jan. 10, 2000), contains authority for imposing the age and service minimums in a safe harbor plan context. However, the plan must provide that the ADP (and ACP if applicable) will be satisfied for the portion of the plan pertaining to elective contributions (and matching contributions if applicable) for those who do not satisfy the age and service minimums. I have seen plans utilize this design.