Who is included in ADP test when Safe Harbor eligibility is more restrictive?

I've been trying to research this issue but so far have fallen short. The plan's eligibility for employee deferrals is age 21. But eligibility for Safe harbor NE and Profit Sharing is age 21 with 1 year of service. We are assuming because eligibilty for the Safe Harbor is more restrictive than that of employee deferrals, we do not get the "free pass" on ADP testing. The question becomes, who then do we include in the ADP test? What we think is the employees that need to be included would be those who have met eligibility for employee deferrals, but NOT eligibility for Safe Harbor contributions. However, we are having difficulting finding that anywhere. Thoughts? 

I've found when the plan design incorporates this design type, it's best set entry dates to 1/1 and 7/1. This way you can exclude otherwise eligible employees and test them separately. You can't use the carve out method when the plan is SH.

I haven't been able to identify a clear breakdown of how to test the plan otherwise, although I'm certain someone smarter than me has figured it out.

That said, I've often wondered if you could write a provision into the plan document that stated if at any point in a given plan year a participant is eligible for elective deferrals but not eligible for safe harbor they would be thrown into ADP/ACP testing.

From a very reliable source in the industry:

1. Is it permissible for the eligibility requirements for a SHNEC to be different than the eligibility requirements for salary deferrals?

Yes.

2. If so, what (if any) are the ramifications to the plan?

a.  The participants who are not yet eligible for the safe harbor contribution are subject to ADP testing.  However, if there are no HCEs in this group, they automatically pass the ADP test.

b.  The plan will not be exempt from the top heavy minimum contribution requirements (if it otherwise would have been).

3 hours ago, Megandps said:

I've been trying to research this issue but so far have fallen short. The plan's eligibility for employee deferrals is age 21. But eligibility for Safe harbor NE and Profit Sharing is age 21 with 1 year of service. We are assuming because eligibilty for the Safe Harbor is more restrictive than that of employee deferrals, we do not get the "free pass" on ADP testing. The question becomes, who then do we include in the ADP test? What we think is the employees that need to be included would be those who have met eligibility for employee deferrals, but NOT eligibility for Safe Harbor contributions. However, we are having difficulting finding that anywhere. Thoughts? 

This type of plan design relies on the ability to disaggregate the portion of the plan that covers otherwise excludable employees. Under this design, you have two groups of employees and two disaggregated plans. The  first plan covers the group of employees who have satisfied the minimum age and service conditions under 410(a). That plan satisfies the ADP test by way of the safe harbor contribution, which is provided to all NHCEs (and optionally HCEs) who are eligible to defer.

The second plan covers those employees who have not yet satisfied the minimum age and service conditions under 410(a). This plan will typically not cover any HCEs, since an employee has to have prior year compensation above the applicable limit to be considered an HCE, and employees who do not have a year of service will typically not have prior year compensation that high (if they have any at all). This plan satisfies the ADP test automatically as long as  it covers no HCEs.

If you have any employee who will be an HCE before they meet the statutory eligibility requirements, you can have a problem with the otherwise excludable group. Usually this would happen if someone who is a 5% owner by attribution (such as the owner's spouse or child) becomes an employee. If that is a concern you may want to specify in the plan document that 5% owners have to complete a year of service before they become eligible to defer.

As sb0828 mentioned, if the plan is top heavy, they lose the top heavy exemption with this plan design. If we are talking about a 3% safe harbor non-elective contribution, then the sponsor is going to end up making the 3% contribution for all employees, except those who terminated before meeting statutory eligibility. The contribution for the employees who have not met statutory eligibility can be subject to a vesting schedule, although if the employer was not intending on making other contributions which would be subject to a vesting schedule then this may be more administrative hassle than they were prepared to deal with.

The authority for what C.B. Zeller describes starts with 1.401(k)-3(h)(3), and then follow the cross-references. 

Is it true that another consequence of this type of design is that the plan will be unable to use the ABT to pass coverage?

I think the biggest danger with this design is the loss of the top heavy exemption (especially for plans using the matching safe harbor who have high turnover or high workforce growth). Essentially, the top heavy status of the plan will not be determined until the next plan year has already begun. Thus, if the plan flips into top heavy status, the sponsor is stuck with the minimum top heavy contribution for at least one year.

I try to steer sponsors away from this dual eligibility safe harbor plan design. If they won't relent, make sure you keep a close watch on the TH ratio and try to warn the sponsor a year ahead about the possibility of the plan becoming TH so they have time to amend the plan.

37 minutes ago, M.S. Hatlee QPA, QPFC said:

Is it true that another consequence of this type of design is that the plan will be unable to use the ABT to pass coverage?

 

Not that I am aware of.

49 minutes ago, M.S. Hatlee QPA, QPFC said:

I think the biggest danger with this design is the loss of the top heavy exemption (especially for plans using the matching safe harbor who have high turnover or high workforce growth). Essentially, the top heavy status of the plan will not be determined until the next plan year has already begun. Thus, if the plan flips into top heavy status, the sponsor is stuck with the minimum top heavy contribution for at least one year.

I try to steer sponsors away from this dual eligibility safe harbor plan design. If they won't relent, make sure you keep a close watch on the TH ratio and try to warn the sponsor a year ahead about the possibility of the plan becoming TH so they have time to amend the plan.

Yes.  TH and dual eligibility are a bad combination.