Safe Harbor and Dual Eligibility

I was listening to a discussion the other day regarding dual eligibility in safe harbor plans.  One individual mentioned that they had clients who allowed immediate entry for deferrals but had a 3 month wait for the safe harbor match. 

I know you can use disaggregation to require a participant to earn the statutory entry requirements before they are eligible for safe harbor, the caveat being that ADP testing is required for that group, which could include HCEs, and the plan would not be deemed to be non-top heavy, but I'd never heard that you could have dual eligibility as was described.

Has anyone had any experience with that type of design?  I had always thought that once you were eligible for deferrals you were eligible for safe harbor (at least the NHCEs), notwithstanding the disaggregation option.

Thanks.

Different parts of the plan can have different eligibility conditions. It can create some of the issues you discus in your original post. But if someone wanted to they could have something crazy like immediate eligibility for deferral, 3 month eligibility for safe harbor match, 6 month eligibility for non safe harbor match and 1 year of service for profit sharing. As long as the document was drafted correctly.

I mean I'm not sure the added complexity would be worth it but if you aren't top-heavy and don't have owners with less than a year of service it's likely to pass all discrimination tests without a problem. There are some issues if you have a very high paid employee who becomes an HCE the 2nd year because they made over the limit in just a couple of months, you hire someone who immediately is a more than 5% owner in the first year (usually an owner's kid or spouse). But generally speaking everyone in your under 1 year of service group is going to be all NHCEs which will automatically pass for that group.

If you are top-heavy, you'll lose the "deemed not-top-heavy" exemption with this kind of design so probably not ideal in the very small plan market in most cases.

So for the ADP test the deferrals used would be only the deferrals made during the 3 month wait to receive safe harbor?  If so, would you also use only the compensation earned during the period the participant was not eligible for safe harbor? 

So assuming the 90 day wait, a participant is hired January 1 and is eligible to defer immediately, but not eligible for safe harbor until April 1.  The ADP test for that participant would be the deferrals made and compensation earned from January 1 through March 31?  And for the plan year you would need to capture the deferrals and compensation for all similarly situated participants to include in the ADP test?

I don't think you can disaggregate otherwise excludable employees on any basis other than the maximum age and service conditions of 410(a). Your disaggregated plans for deferrals will be those with less than 1 year of service (ADP test required), and those with more than 1 year of service (safe harbor). For match your disaggregated plans will be those with more than 3 months but less than 1 year of service (ACP test required), and those with more than 1 year of service (safe harbor).

Ok, yes that makes more sense CB.  Thank you Lou and CB for your time and expertise.

I have a similar question to the one raised earlier by @Gilmore. While reviewing the conversation, I’ve get some helpful insights. However, could you @C. B. Zeller and @Lou S. please point me to the specific Treasury Regulation section or provide a reliable reference that explains this scenario in detail? I’d like to review the official guidance to better understand the rules and ensure proper compliance.

On 6/15/2021 at 2:50 AM, C. B. Zeller said:

I don't think you can disaggregate otherwise excludable employees on any basis other than the maximum age and service conditions of 410(a). Your disaggregated plans for deferrals will be those with less than 1 year of service (ADP test required), and those with more than 1 year of service (safe harbor). For match your disaggregated plans will be those with more than 3 months but less than 1 year of service (ACP test required), and those with more than 1 year of service (safe harbor).

Could you please specify the exact Treasury Regulation section or provide a reference that explains this scenario in detail? I’d like to review the official guidance to better understand the rules and ensure compliance.

SECURE and SECURE 2.0 may have changed some of the analysis, especially with respect to T-H minimum of otherwise excludable so I'm not sure  this 4 year old thread is the best place for your question.

But this may get you in the right direction https://www.asppa-net.org/news/2017/11/otherwise-excludable-employees-and-entry-dates/

It gives the IRS reasoning with code sites on otherwise excludable but it is almost 10 years old and I don't know if it has been superceded by additional guidance depending on what your specific question is.

Right, it sounds like a request that they point to something that says you can't do what you want differently from the one way it's officially spelled out as okay in those rules.

But in practicality they shouldn't matter, since top heavy minimums to otherwise excludable employees can be stripped from a plan's provisions these days.

2 hours ago, TH 401k said:

Could you please specify the exact Treasury Regulation section or provide a reference that explains this scenario in detail? I’d like to review the official guidance to better understand the rules and ensure compliance.

1.410(b)-7(c)(3) is the reference. The relevant part states, with formatting added to make the point clear:

Quote

The plan is treated as comprising separate plans:

• one benefiting the employees who have satisfied the lower minimum age and service conditions but not the greatest minimum age and service conditions permitted under section 410(a) and
• one benefiting employees who have satisfied the greatest minimum age and service conditions permitted under section 410(a).

@C. B. Zeller@Bri@Lou S.The plan uses age 21 with no service requirement and monthly entry for Deferral eligibility, and age 21 with 6 months of service and quarterly entry for Safe Harbor Match eligibility. Plan is not top heavy. 

In this setup, I’d like to clarify the following:

Are employees who meet both Deferral and Safe Harbor Match eligibility requirements automatically deemed to pass ADP and ACP testing? Are employees who are eligible for Deferral only, but not yet eligible for Safe Harbor Match, subject to ADP and ACP testing?

Or, in this scenario, should we perform separate testing for employees who meet statutory eligibility versus those considered otherwise excludable? If any HCEs fall into the otherwise excludable group, does the plan become subject to ADP and ACP testing for that group?

Looking for clarification on how eligibility impacts testing requirements under this structure. The documents I’ve refered to so far don’t specifically address this type of scenario in detail.

Your "main" coverage and nondiscrimination tests - and by that I mean the people who aren't excludable because they're short service - will include everyone who qualified for the safe harbor match.  So those will pass automatically (presuming no other exclusions written into the document like job categories).

Your test for the otherwise excludables - those who are in, but only because your plan's eligibility is easier than required - will include some people who are not eligible to receive a safe harbor match yet.  As such that subgroup does not automatically pass its ADP/ACP tests.  However, it's very likely you have no HCEs in that group (but not definitively the case automatically), and so those tests probably pass by default.

13 hours ago, Bri said:

Your "main" coverage and nondiscrimination tests - and by that I mean the people who aren't excludable because they're short service - will include everyone who qualified for the safe harbor match.  So those will pass automatically (presuming no other exclusions written into the document like job categories).

Your test for the otherwise excludables - those who are in, but only because your plan's eligibility is easier than required - will include some people who are not eligible to receive a safe harbor match yet.  As such that subgroup does not automatically pass its ADP/ACP tests.  However, it's very likely you have no HCEs in that group (but not definitively the case automatically), and so those tests probably pass by default.

@BriHere’s my understanding and a few questions based on the scenario:

For example, suppose the plan has 20 employees—5 HCEs and 15 NHCEs. Out of these, 4 HCEs and 12 NHCEs are eligible for both Deferral and Safe Harbor Match, so this group is deemed to pass ADP and ACP testing. The remaining 1 HCE and 3 NHCEs are eligible for Deferral only, but not yet eligible for Safe Harbor Match. Since the HCE falls into the otherwise excludable group (i.e., not eligible for Safe Harbor Match), this subgroup would be subject to ADP and ACP testing. Am I interpreting this correctly?

Typically, my approach is to examine whether any HCEs fall into the otherwise excludable group—for example, those who haven’t yet completed age 21, one year of service, or semi-annual entry. If they do, I consider the plan subject to ADP and ACP testing for that group.

Based on the example above, if my interpretation is correct based on your response above, should I perform separate ADP/ACP testing in ASC software by updating location one —one for the main group (3 HCEs and 12 NHCEs) that is deemed to pass, and location 2 another for the otherwise excludable group (1 HCE and 3 NHCEs)?

Also, is this kind of classification and separate testing approach permissible under Treasury Regulations? I’m not entirely sure and would appreciate clarification from other like @C. B. Zeller @Lou S..

The division of the employees is NOT based on whether or not they've met your specific plan's match eligibility condition, but whether they'd met the IRS statutory 1 year/21. 

As you have only a 6 month wait for match, it's readily conceivable that you have people who qualify for the match, but are nevertheless in the otherwise excludable group's test. 

1 hour ago, Bri said:

The division of the employees is NOT based on whether or not they've met your specific plan's match eligibility condition, but whether they'd met the IRS statutory 1 year/21. 

As you have only a 6 month wait for match, it's readily conceivable that you have people who qualify for the match, but are nevertheless in the otherwise excludable group's test. 

Just to confirm—participants can be segregated based on whether they’ve met the IRS statutory eligibility requirements (i.e., age 21 and one year of service). Those who haven’t met these requirements are considered otherwise excludable employees. Am I understanding this correctly?

That's the basic idea - pretend you had the longest allowable wait period, and then the folks who would STILL be in the plan even then make up your non-excludable group.

Thanks so much for the insights—they have been clarified the concept perfectly.