Top Heavy and Safe Harbor

We have a plan that has a Safe Harbor NEC contribution.    Prior to 1/1/2020, the pretax eligibility was 60 days, SHNEC 1 YOS. With those provisions, they lost their top heavy exemption.  (of course they are top heavy)

1/1/2020, they change the eligibility for both pretax and SHNEC to 1 YOS.  So we thought all would be good.  However, they rehired a participant at the time of previous employment met the pretax eligibility.  Upon rehire, they are now eligible for pretax, but still have not completed a YOS for the SH contribution.  

How does this impact their top heavy exemption?  Does it still apply or since they have a participant not SH eligible does it  not apply?  Would they need to give her a TH contribution?  If so since the plan excludes comp prior to eligibility, would they have to calculate the 3% on gross comp for those that became newly eligible in 2021? 

My initial thought is the rehired employee is the only one on the non-safe harbor side of the equation and will need the Top heavy contribution.

Everyone else is on the safe harbor side of the equation and Not needing a top heavy as they are getting the safe harbor contribution.

Very interesting set of circumstances......  curious to see other's thoughts.

The SHNEC for some is based on plan comp not gross comp.  Does that make a difference?

Don't quote me, but I don't think so.

I could see someone making a strong case that because the plan does not get the top-heavy exemption and the newly eligibles in 2021 aren't getting 3% from the employer based on full year comp, they new eligible should get bumped up to 3%.

The murky waters of a once dual eligible plan...... gotta love it...... except I don't.

5 hours ago, justatester said:

Upon rehire, they are now eligible for pretax

I would review the amendment carefully, because this is not necessarily true. Depending on how the amendment was written, someone who was previously eligible but has never actually completed a year of service may need to complete that year of service before they are considered eligible again. Does the amendment explicitly addresses this in any way? Does it say, for example, that anyone who was a participant on any date prior to the effective date of the amendment will continue to be a participant after the effective date?

If this person actually did re-enter the plan immediately upon re-hire then you lose the top heavy exemption on the entire plan. All non-key participants who are actively employed at the end of the year will need to receive a contribution of 3% of their full year compensation.