Exclude HCE from 3% safe harbor nonelective

This is a 3% non-elective 3% safe harbor hce are included in the plan (they are allowed to participate in all contribution sources).  The question is:  the client does not want one of the hce's to receive the 3% safe harbor contribution.  Can we simply not give the HCE the 3% safe harbor contribution?

You must follow the terms of the written plan. Look at the notes or other parameters around the safe harbor and see if the employer has any discretion there. If not, follow the written plan provisions, as a plan must comply in operation with those terms to retain its tax friendly (tax qualified) status.

The plan may be amended prospectively to exclude HCEs from safe harbor, of course. 

Imagine a plan’s sponsor seeks to exclude from a nonelective contribution (prospectively, beginning with the next plan, business-accounting, and calendar year that begins after the plan amendment), not all highly-compensated employees but one particular HCE specified by name.

May a plan’s documents provide that?

Or is there some IRS guidance against doing that?

At least some pre-approved documents provide for an "other" election for excluding participants from the Safe Harbor contribution, where they specify that it must be "an HCE, or" ............... so I don't see any prohibition about specifically naming an HCE as excluded. But I'll ask this - why? Given that documents can provide complete flexibility to exclude all HCE's, but make a "discretionary" Safe Harbor to "any or all" HCE's - what would be the point of limiting the flexibility by specifically naming one HCE?

Belgarath and C.B. Zeller, thank you for your helpful thinking.

There are businesses for which the employer and each executive negotiate the executive’s compensation, including health coverage (or not), employer-provided retirement contribution (or not), other employee benefits, fringe benefits, and other elements.

While a plan’s sponsor might welcome discretion, an executive might insist that each employee-benefit plan’s governing documents unambiguously state promises that follow one’s negotiated employment agreement. An incautious executive might accept an employment agreement alone. But a careful executive might want, in addition, employee-benefit plans’ documents that provide ERISA § 502(a)(1)(B) rights one can enforce in Federal and State courts.

So, for example, if three of four executives get the retirement plan’s nonelective contribution, and only one negotiated for something else, a retirement plan that excludes by name only the one and includes the others might serve such a purpose.

I see there might be several ways to accomplish an intended provision, and I’m glad to learn that it’s possible even within an IRS-approved document.

3 hours ago, C. B. Zeller said:

A better approach is to exclude all HCEs from the safe harbor, and rely on the plan's individual-groups allocation formula for nonelective employer contributions to make an allocation to some or all HCEs, if desired.

Exactly!

Although I think the probability is vanishingly small, relying solely on the new comparability could bring top heavy into play where it MIGHT not be otherwise. Just a thought...