Question Re: One Employer, Two Plans

I have a client who has about 60 employees, with a small portion being classified more or less as a leased employee that they send to other corporations (roughly 10% as of today fall in this class).  I don't foresee any issues with 403(b) or any other testing, given the size of the group, but currently they are offering a 401(k) Plan with a 4% Safe Harbor Match.  What they want to do is not be required to do the match for these leased employees, but want to be able to allow them to contribute.  

My first thought is to have two separate plans setup:

1) The current plan, just amending the document to excluded these leased employees, and continue with the 401(k) + Safe Harbor Match
2) A new plan (#002), which only covers the leased employees and have a 401(k) with a discretionary contribution

I can't think of any issues that may be caused by this, but I wanted to bounce it off everyone to make sure my thinking was correct and I wasn't overlooking anything.  I don't believe I can just excluded the leased employees from the Safe Harbor Match, but allow them to participate in the 401(k).

Thanks everyone and I hope everyone is well and staying safe.

The amendment excluding employees to be leased out to other companies from the current plan can't be made in the middle of a plan year.

Make sure the client understands that passing coverage testing assumes that the employee leasing business doesn't become too large as a % of the company.

Will the cost / administrative burden of having two plans be less than the projected cost of contributions if the employees to be leased remained eligible for the 4% safe harbor match?

Other than that, everything sounds fine.

Followup question as I work through this.  Would the two plans be tested for ADP together or separately?  

Thanks again!

Well, you are setting up a separate plan and one plan has intended to be a 401(k) / 401(m) safe harbor plan and the other plan's employer contribution is discretionary.  It sure sounds like you intend for the two plans to be tested separately.

If tested separately for ADP / ACP tests (such as one is a safe harbor plan and the other is subject to ADP / ACP testing), then they have to be tested separately for 410(b) coverage testing and other testing purposes.

I admit that the facts of your situation are not entirely clear to me given that you mention 403(b) in your first post.