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Question 18

Q. Back in November 2013, I posed a question on plan setup under safe harbor rules. Your answer was to give a 4% nondiscretionary contribution to all employees who qualify, and that way the plan would be nondiscriminatory.

The employer provides 100% vesting. There is a 60-day wait for the employer match (100%, up to 4%), and an employee needs to work 20 hours per week to qualify for the match. The employer has no highly-compensated employees (HCEs) at this time, but has two employees that are close; one earns $100,000 and the other $110,000. 

Of course, an employer with 750 employees currently full-time to part-time will not like giving out 4% to all who qualify. So my questions are: what would this type of plan setup be, and what are the possible ramifications at Form 5500 filing time?

A. As long as there are no HCEs (HCEs are those that earn $115,000 or more in 2013 and 2014, indexed), the plan is automatically nondiscriminatory since the nondiscrimination rules are in place to prohibit substantially greater contributions for HCE’s than for lower-paid employees. In fact, since the plan is automatically nondiscriminatory, there would be no need for a safe harbor plan to avoid average contribution (ACP) testing in the 403(b) plan. The employer’s eligibility requirements (60-day wait for the employer match) would appear not to violate ERISA eligibility requirements, which can generally be no more than age 21 and one year of service (comprised of 1,000 hours or more).

Employers can be more liberal than that! Note that the employer should take care with the 20 hours per week to qualify for the match, noting that this can be no greater than 1,000 hours per year. And, of course, there can be no waiting period before employees are permitted to make elective deferrals.

In fact, the listing of required modifications the IRS posted in conjunction with the 403(b) pre-approved plan document program tells us that newly hired employees must be notified about their right to participate in the 403(b) plans within 30 days of hire, and given another 30 days to enroll. (Final note: I am assuming that these questions are being posted about an ERISA 403(b) plan!)