New safe harbor plan

[PensionPro]

We have a situation where the HCEs have had a separate 401(k) plan since 1/1/2025.  They want to establish a new safe harbor 401(k) plan for the NHCEs effective 10/1/2025.  Is there an issue with HCEs being eligible to defer since 1/1/2025 and NHCEs being eligible to defer effective 10/1/2025.  Does it matter if they elect a safe harbor match or safe harbor nonelective?

It may be cleaner to have a safe harbor plan effective 1/1/2026 but, thinking out loud, is it possible to have a safe harbor effective 10/1/2025 and the NHCEs have a missed deferral opportunity for the first three quarters of the year?

Thanks for any insights.

[justanotheradmin]

Some initial thoughts / questions

I'm assuming there are NHCE that would have been eligible to defer as of 1/1/2025 but for some sort of written class exclusion. But those are assumptions, please correct if wrong. 

I would think SHNEC would need to be retro to 1/1/2025, to cover the entire period deferrals were available to the HCE. 

yes, there is a coverage/benefits, rights, and features issue - a retro corrective amendment to allow them to defer to correct the missed opportunity to defer along with QNEC if needed. 

If considering SH Match, I would expect a full missed match correction per EPCRS would be needed back to 1/1/2025 for the NHCE, but I'm not sure I even see SH Match as an allowable option. 

• Why aren't the NHCE part of the HCE plan? Are they specifically excluded as a class? While it possible, its a bit unusual, depending on the industry and document provider. 

Why start a separate plan for the NHCE? There are valid business reasons to have separate plans for separate classes, but many small employers find it not worth the effort. 

Is there a top heavy issue? 

[PensionPro]

@justanotheradmin Here is some more context - the HCEs had solo 401k plans and did not realize there were NHCEs in other members of the affiliated service group.  They want to get rid of the solo 401k plans and have all members of the ASG adopt the new 401k plan.  TH issue is a consideration so a 3% SHNEC is the frontrunner.  Thanks for your thoughts.

[CuseFan]

Was the ASG a relatively new development or does it go back years? If the former, might they avail themselves of the M&A transition rules? If the latter, only fixing prospectively is risky.

[PensionPro]

There is no risk in prior years, NHCEs were only hired starting in 2024.  Failures in 2024 are being corrected under EPCRS.

[justanotheradmin]

2 hours ago, PensionPro said:

@justanotheradmin Here is some more context - the HCEs had solo 401k plans and did not realize there were NHCEs in other members of the affiliated service group.  They want to get rid of the solo 401k plans and have all members of the ASG adopt the new 401k plan.  TH issue is a consideration so a 3% SHNEC is the frontrunner.  Thanks for your thoughts.

Are these all separate business entities? and the entity that employs the NHCE was not a participating ER to any of of the solok plans?

Do any of the solok plans already have a SH provision? I often see SoloKs set-up with SH to NHCE only so that if a NHCE becomes eligible in the future its already addressed. If so, there may be a continuity issue with a new 401(k) plan if it doesn't have the same type of SH benefit. if the SoloK had a SH Match, and the new plan is SH NEC and they are part of the same testing group, they typically would not be able to use the SH provisions to get a waiver on the ADP/ACP testing for that year. 

You should also analyze for possible successor plan issues. 

[Lou S.]

I see all the usual things you are going to want to check, 410(b) coverage, 401(a)(4) coverage, missed deferral opportunity, top-heavy minimums.

And you are going to have aggregate those solo-ks with the employee plan for much of it.

I think you might only be able to do 3% safe-harbor for 2025 and I don't think you'll be able to terminate and roll the solo-ks to IRAs due to successor plan rules.

There may be other options but the cleanest might be to start a new safe harbor 401(k) retro active to 1/1/25 for the whole ASG - merge the existing solo-ks into the new plan either now or 1/1/26 - test all plans together  - and give NHCE an additional QNEC for the missed deferral opportunity from 1/1/25 - whenever you can start deferrals under the new plan.