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How do ineligible family members (due to very part-time hours) get treated in a 401(k) Safe Harbor Plan?

For plan year 2012 we changed our 401(k) to a Safe Harbor plan with a 3% contribution to all eligible employees. The question is about family members...my husband's mother worked only 384 hours and our daughter works part-time (10 or so hours a week) but is paid a salary so no hours are reported. Both were given the 3% Safe Harbor Contribution and our Profit Sharing contribution (formulated to give the most to the husband/wife owners) to NCHE's was a substantial 8.07% due to them being considered HCE's. Is it correct that they even though they were in-eligible to participate in the plan due to their failiing the less than 1,000 hours requirement they were given the Safe Harbor contributions and that they must be treated as HCE's in the New Comparability testing for the Profit Sharing. Is my plan administrator not on-top of the rules or is this a Catch-22 situation just because they are family members of >5% owners?

Mar 19, 2014 by Mary from Carmel, CA in  |  Flag
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Peter C. Karp Level 20

Mary,

The important word in your question is ineligible. Ineligible family members are treated just like any other ineligible employee in a 401(k) safe harbor plan, they do not get a safe harbor allocation nor are they allowed to participate. You need to look at your plan document to identify eligibility requirements as some plans may have multiple requirements. Confirm who is included or excluded in the plan document as it is the driving force behind participant contributions. If you are concerned about your administrator’s capabilities we would encourage you to get a second opinion as mistakes can be costly. Please contact our office at 415-345-8185 to discuss your situation in greater detail.

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Comment   |  Flag   |  Mar 27, 2014 from San Francisco, CA

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Hi Mary, Peter is spot-on. Check to make sure the plan is being run in accordance with the provisions in the documents. If they are eligible, then yes, they would end up with the profit sharing contribution and the 3% safe harbor contribution.

Comment   |  Flag   |  Mar 27, 2014 from Alexandria, VA

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