Safe Harbor Plan with different eligibility for Deferrals and Safe Harbor

We have a plan with immediate eligibility for elective deferrals and delayed eligibility for the safe harbor match (I believe the standard 12-month with entry date).

I know the ADP test is required for the <1 year group and the exclusion rule can be used, so the ADP test is not an issue.  Someone in this group mentioned in the past though that top-heavy could be an issue.  So when only safe harbor match is funded, no profit sharing, this plan is not deemed to meet top heavy rules because of the differing eligibility?  And not only that, all participants would be eligible for the top heavy contribution if the plan were top heavy.  Fortunately it is not but climbing and getting into the danger zone - approaching 50%.

We always applied top heavy 3% to plans with different eligibility when profit sharing was funded.  90% of our plans are top heavy and have same eligibility for all sources.  But this plan with only delayed safe harbor is a unique plan for us.

Thank you for your comments.

This is the law change coming from SECURE 2.0, that you can completely disaggregate for 416 (top heavy) purposes.  Soon, the same people you're testing separately for 401(k) purposes will be able to be tested separately for TH purposes.  And so since their separate test very very likely will have no Keys, their subgroup will be not top heavy, and so folks in that situation can be skipped for the 3%.  (Even if the "statutory" employees are in a top heavy plan for their population.)

why is the ADP test required for the <1 year group in a safe harbor plan?  I didn't think the differing eligibility changed anything except for losing the top heavy exemption.

An ADP test and possibly ACP is required because those with the 1 year wait are not able to get the Safe Harbor contribution.  Therefore, it's not fully a Safe Harbor plan for all employees.  It's only a Safe Harbor plan for those that meet the eligibility requirements to receive the Safe Harbor.

I like to try to keep my Safe Harbor plans to single eligibility expressly for this reason.  In my opinion the dual eligibility design ruins the efficiency of a Safe Harbor plan.. especially the plan that only does deferrals and safe harbor contributions.  I don't want to work that hard inside a Safe Harbor plan.  And then, with dual eligibility safe harbor, I have to concern myself with Top heavy, did a KEY employee come into the plan and defer a percentage that will require refunds.  To some extent, I am thinking harder about Safe Harbor plans than I am with a non-safe harbor plan.

We all have to be really sharp on the Safe Harbor plans.  There are some pitfalls that we don't want to fall into.

I came here to ask this almost same question... except that I'm looking at the 3% SHNEC.

It's a MEP where the new company started up in 2022 and immediately joined the MEP (with immediate eligibility for deferrals and 1 YOS/semi-annual for the SH).  Owners and some employees were hired in June 2022, and the rest (including a daughter of the owner) in Sept/Oct 2022.  The only twist I have is that HCEs are not eligible for the SH.

If the daughter does not defer in 2023, I think in that year I can satisfy the rules because the only HCE in the otherwise excludable group won't be deferring.

For 2022, I think they are doomed.  One of the owners deferred $15K in 2022... and only took $28K in compensation (the rest was on his s-corp K-1).  Since everyone is otherwise excludable, the HCEs are in that group and therefore it has to be testing.  And it's going to be top heavy because none of the employees deferred anything substantial... so at least I'm going to call the 3% TH a QNEC and help with the ADP a little.

Anything else I can use or look at?  I was really hoping that HCE exclusion would help.

I agree with not designing a plan this way, but sometimes we don't get to change provisions on a takeover (like this).

@pmacduff, I can't quote the reg, but in the EOB it's Chapter 11, Section XIV, Part I.6.  I'm looking at the example in 6.a.1)b) for the SHNEC version.

I feel your pain Albany, I had a dual eligibility safe harbor match and two of the owners wife's deferred 70 to 80% of pay right away..... no catch up available....and then losses on top of that for the year.  I refunded them alot of money.  It was bad.

A compromising approach could have been a single eligibility of a 6 months wait.  This would have solved much headache.