safe harbor for those still employed on LDOY only

[Tom]

I doubt this is possible but I wanted to be 100%.  We've always provided the 3% nonelective safe harbor to all eligible regardless of employment condition on last day or hours worked.  

A large client does not want the terminated employees to get 3% as the cost is fairly high.  A 3% profit sharing plan to those still employed does pass coverage but the plan will not pass ADP and the client is firm - no corrective distributions.    

Is it possible to test the terminated employees ADP (there are no HCEs in that group) and only give the safe harbor to those still employed?  The plan is not top heavy.

Just taking a wild shot on this. Thank you,

Tom

[CuseFan]

No. If initial eligibility is satisfied for 3% SHNE and someone enters the plan they get the 3% SHNE for however long they were employed and in the plan, whether a day, a week or through year-end.

[C. B. Zeller]

Cuse is correct. If your client needs proof, you can point them to IRC sec. 401(k)(12) which requires that the contribution be made to "each employee who is not a highly compensated employee and who is eligible to participate in the arrangement." Also see Example 4 in 1.401(k)-3(c)(7) of the regulations which is exactly on point that you can not impose a last day requirement on a safe harbor contribution.

[BG5150]

Did no one explain this to the client during plan setup?

[Peter Gulia]

Or, differently asked, did anyone have a duty or obligation to explain this to the plan sponsor?

(And, was it explained, but the plan sponsor was inattentive?)

 

[BG5150]

I guess in a narrow view, nobody HAD to explain it to the ER.  It's up to them to understand the plan document they are signing, and they are the ones (usually) tasked with operating the plan.

However, I'm guessing someone approached the ER about setting up the plan and steering them to a SH arrangement.  Whoever did that should have at least explained it to the ER the mandatory contribs and the conditions under which they would be made.

It's certainly possible that the ER just tuned out and/or only heard the PS part of the funding.  Or maybe thought the SH and PS were the same...

I guess they can remove the SH for '26 and just do ADP testing.  And tehy doen' even have to give refunds!  They can do a QNEC.  And guess what?  Those don't even have to go to those employed on the last day of the year either!

[Peter Gulia]

BG5150, I see a responsibility as you do. If someone recommended a safe-harbor provision, that person ought to have provided information to explain not only the reasons supporting the recommendation but also the conditions and consequences of the provision and the advantages and disadvantages of using the provision.

Further, some might say an explanation ought to be no less clear, conspicuous, or understandable than the recommendation was.

And here’s a point for many service providers to consider: If a person not licensed to practice law provides tax or other legal advice, the standard of care is no less than what a professionally behaving lawyer would have done.

This is not advice to anyone.

[AlbanyConsultant]

Sadly, telling a potential plan sponsor about how the safe harbor works during a sales meeting has no bearing on what they remember over a year later when you provide the contribution amounts.

[Paul I]

Let's face it.  A client complaining about giving the SHNEC to terminated employees more often than not is motivated by two things.

The first is greed.  The client likes the idea that they can maximize elective deferrals and think nondiscrimination tests are unfair to HCEs (and they abhor refunds).

The second is the perception that terminated employees were not committed/loyal to the company and should not be "rewarded" with a 3% contribution (even though the SHNEC is very much akin to the employer funding payroll taxes).

Sometimes the message has to be if the client wants the privilege of avoiding nondiscrimination testing (i.e., being able to maximize deferrals), the cost of that privilege is the 3% SHNEC.

That being said, when a significant number employees do not defer, changing the plan design to a Safe Harbor Match often reduces the overall employer cost which seems to somewhat placate the client (until the employees catch on and start deferring more).

Kudos to @Tom for trying to be responsive to his client and taking a wild shot.