Exclude NHCE that are currently eligible

I believe this has been addressed before - if so, please feel free to link to the other discussions / posts and I'll read through them. 

Small employer has a a fairly vanilla 401(k) plan with deferrals, safe harbor, and profit sharing. They would like to reduce the contribution to the NHCE by adding an excluded class. The one HCE would also be excluded from everything except deferrals. A number of the eligible NHCE would be excluded from the plan. Assuming coverage testing passes, this feels like a cut-back, or a violation of BRF, but I know the ability to defer is not protected, nor is right to receive an employer contribution. 

Usually if initially setting up a plan we are proactive in class exclusions as part of the design process, so I don't see requests for exclusions after the fact and just feel like I am missing something. 

What say all of you smart people? Is there something I'm missing that would prohibit or make this type of amendment problematic?

When is the change supposed to be effective? If it's starting the next plan year then go ahead. If it's supposed to be mid-year then you are out of luck. Notice 2016-16 specifically prohibits mid-year amendments that reduce the number of employees eligible to receive a safe harbor contribution.

seconded

Yes, to be effective with the start of the next plan year. No changes this year. 

Thanks for the confirmation, not sure why I was second guessing myself. 

Different eligibility terms for different contribution structures eliminates the exemption from Top Heavy Minimum.  The comment about the one HCE excluded from everything but deferrals is a huge flashing red light IMHO.

Below Ground - good point, but not one that happens to apply here. I should have mentioned the one HCE happens to be the owner, and the only Key, and they would not receive the Top Heavy minimum under the current terms of the plan or the proposed revised terms (the plan actually isn't top heavy at the moment, but that could change). She doesn't want to do anything but deferrals for herself, and deferrals + Safe Harbor and occasional additional discretionary ER for a core group of NHCE. 

On 8/21/2019 at 4:36 PM, Below Ground said:

Different eligibility terms for different contribution structures eliminates the exemption from Top Heavy Minimum.  The comment about the one HCE excluded from everything but deferrals is a huge flashing red light IMHO.

Why is that?

To me, as long as coverage is passed, then it'll be ok.

Agree that at the beginning of a plan year, the amendment to create an excluded class is permissible (subject to coverage testing). 

But, the excluded class (prospectively) are still participants, with no immediate distributable event.  They continue to earn vesting credit on any existing subject to vesting employer money sources (like profit sharing) and still have to receive all required notices, fee disclosures, SPD, SMM, educational material and continue to have rights to loans, hardships, etc. If the change classifications, to an eligible class, they must resume participation immediately. Complications lead to mistakes.

BG5150 go to http://product.ftwilliam.com/wp-content/uploads/2017/09/Safe-Harbor-Webinar-2017_FINAL.pdf.This is an outline for a seminar by FT Williams.  On page 26 you will find: "Eligibility may be different for deferrals and safe harbor contributions:  Caveat Emptor! Disaggregated testing will apply and plan will have to test for top heavy status."  I added the bold for emphasis.  Another is a discussion on Benefits Link 

and look at reply by JRN.  Also, you will find a discussion buried in Rev. Proc. 2014-13.  I have several reference texts that state that dual eligibility results in Top Heavy Testing applying.  There are quite a few other references, but hopefully these few answer your question.

On 8/23/2019 at 5:01 PM, Below Ground said:

Disaggregated testing will apply and plan will have to test for top heavy status."  I added the bold for emphasis.  Another is a discussion on Benefits Link 

 

 

I meant why would excluding HCE for everything but deferral be a "huge flashing red light"?

The benefit of a 401(k) Safe Harbor Plan is avoidance of testing, including testing on deferrals.  Since you have created a special eligibility for the HCE, this would be a form of dual eligibility IMHO; especially since you are allowing deferrals by the HCE that are exempt from testing.  Yes, it can be said that you are "penalizing the HCE" by excluding them from other structures, but the reverse of allowing them to make deferrals outside of the testing environment, is also true.  Regardless, it is the dual eligibility that causes the Plan to be subject to Top Heavy Testing.  That is my primary point.  Keep in mind that when determining the Top Heavy Minimum you must count deferrals by the Key to determine the minimum allocation; meaning 3% will almost always apply if Top Heavy.  Of course, if the Plan is not Top Heavy, this discussion is meaningless unless the Plan is headed to being Top Heavy.

If the dual eligibility was only for the HCE, does it really lose the TH "pass"?  You can exclude HCE from SH with no ramifications.  So what then if they are excluded from PS, too?

Say you had a plan whose sponsor chose not to do PS.  It's just 401(k) and SH.  Are you saying if the HCE are excluded from SH it would be a red flag because they are making deferrals that aren't tested?