| A safe harbor 401(k) cross-tested plan combines two of the most attractive defined contribution plan designs. The interaction of the eligibility conditions, allocation conditions, the top heavy requirements and the minimum gateway requirements requires the practitioner to have a good understanding of these rules when designing such plans. We have identified 19 different plan designs that affect the cross-tested allocation, top heavy minimum contribution and minimum gateway differently. In the series of FAQs below, we describe one of the fact patterns. In each case, assume the participant in question is an NHCE and a non-key employee and is employed on the last day of the plan year. Note: In our Cross-Tested/Safe Harbor 401(k) Plan Design Workshop, we will provide attendees with a copy of the chart. See workshop description below.
In a safe harbor 401(k) plan, which participants must receive the safe harbor contribution?
All nonhighly compensated employees (NHCEs) who are eligible to make elective deferrals in the plan must receive the safe harbor contribution. Note: The plan also can make the safe harbor contributions to the highly compensated employees (HCEs).
May a safe harbor 401(k) plan provide for immediate eligibility for the elective deferrals and one year of service/age 21 eligibility conditions for the safe harbor contributions?
Yes. The plan may take advantage of the “otherwise excludable employee" rule (i.e., permissive disaggregation) to divide the plan into two plans for testing. The “upper group" plan includes all participants who would have entered the plan if the plan had a year of service/age 21 eligibility condition. The “lower group" plan includes all other plan participants (generally those with less than a year of service). The NHCEs (or all participants) in the upper group plan will receive the safe harbor contributions, thus satisfying the safe harbor requirement. The lower group plan is considered a separate plan, and since the participants would not be receiving safe harbor contributions, that “plan" must satisfy the ADP test. Note: Generally, the lower group plan would automatically satisfy the ADP test because it would be composed solely of NHCEs.
Assume the same facts as in the previous question except the plan is top-heavy. Would the participants in the “lower group" plan be eligible for the top-heavy minimum?
Yes. The “otherwise excludable employee" rule does not apply to the top-heavy rules.
If a cross-tested plan which is not top-heavy imposes a 1,000 hour of service allocation condition for the cross-tested allocation and a participant does not satisfy the condition, is the participant entitled to the minimum gateway contribution?
No. The plan need only provide a minimum gateway contribution to an NHCE who is benefiting under the plan. A participant who does not receive any allocations of nonelective contributions (including safe harbor or top-heavy) is not benefiting.
Assume the same facts as in the previous question except the plan is top-heavy. Would the participant be entitled to the cross-tested profit sharing allocation? Top-heavy minimum contribution? Minimum gateway contribution?
No, the participant is not entitled to the cross-tested allocation because the participant does not satisfy the allocation condition. But, yes, the participant would receive a top-heavy minimum contribution because the plan may not impose an hour of service condition on the top-heavy minimum. Therefore, since the employee is benefiting from the profit sharing plan (because of the top-heavy minimum), the participant is entitled to the minimum gateway contribution.
If a safe harbor 401(k) cross-tested plan provides immediate eligibility for the deferrals and one year of service/age 21 eligibility conditions for the cross-tested and safe harbor nonelective contributions, will the plan need to provide the employees who do not satisfy the eligibility conditions (i.e., only eligible to defer) (1) a safe harbor contribution; (2) a cross-tested profit sharing allocation; (3) a top-heavy minimum contribution or (4) a minimum gateway contribution?
(1) No. See the discussion above regarding the otherwise excludable employee rule. (2) No, the participant has not satisfied the eligibility condition for the profit-sharing portion of the plan. (3) Yes. The otherwise excludable employee rule does not apply to the top-heavy requirements. (4) No. Although a non-key employee with less than one year of service would be benefiting and therefore normally entitled to the minimum gateway contribution, if the plan utilizes the otherwise excludable employee rule, the lower group plan participants only receive the top-heavy minimum contribution and the plan would not need cross-testing to demonstrate that the lower group plan was nondiscriminatory. Thus, the lower group plan would not need to make a minimum gateway contribution for those participants with less than a year of service.
Cross-Tested/Safe Harbor 401(k) Plan Design Workshop – 12 cities, August – September
Crossed-tested plans and Safe Harbor 401(k) plans are two of the most dynamic plan designs in use today. In this full-day workshop, we’ll give you analysis and strategies to help you and your clients make full use of the design alternatives. We’ll review the basics, address problem issues, and show you how cross-testing and safe harbor designs can work together in a flexible environment to achieve employer goals and reduce costs. More than just a review of the rules, this program will help you understand the planning possibilities that exist, so you can choose the right tools for your clients.
403(b) Plan Design Workshop – 7 cities, August – September
Designing 403(b) plans can be a minefield for an unwary practitioner. They look similar to 401(k) plans, until one of the many differences comes to haunt you. Universal availability, limited investments, and special rules for church plans are just some of the challenges practitioners face, especially those for whom 403(b) plans are “just a sideline." Plan to join us and learn strategies and approaches a practitioner can use to navigate the minefield, and leave the employer with a retirement arrangement which best satisfies its goals and the needs of its employees.
For more information or to register, click here.
Advanced Pension Conference – Chicago, August 30 – September 1, 2010
The significant changes to the Schedule C foreshadow the new fee disclosure regulations that the DOL will issue this summer. The new regulations will impact most retirement plans and will require revisions to service provider agreements with the plan. The Chicago Advanced Pension Conference will provide practical insight into the new regulations. The conference will also address other topics such as Designing fee agreements, Schedule C case studies, Troubleshooting EFAST2, Hot Topics in Plan Corrections, and Cash Balance Plans for DC Practitioners. Click here for more information.
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