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Dual Eligibility in Safe Harbor Plans and Top-Heavy Requirements

The ERISA consultants at the Learning Center Resource Desk, which is available through Columbia Threadneedle Investments, regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. A recent call with an advisor in California is representative of a common inquiry involving top heavy testing. The advisor asked:

“My client is setting up a safe harbor 401(k) plan with a matching contribution and wants to implement dual eligibility, that is, allow participants to defer immediately into the plan but require one year of service in order to receive the match? Is there any concern in having dual eligibility?”

Highlights of Discussion

There is a concern related to satisfying the  top-heavy requirements when a safe harbor plan has dual eligibility. Please refer to Revenue Procedure 2004-13 for detailed guidance on your particular scenario.

Under Internal Revenue Code Section (IRC §) 416, a plan that is top-heavy for a plan year (i.e., where more than 60% of the plan’s assets reside with key employees) must satisfy minimum vesting and contribution requirements for such plan year [IRC §416(g)(4)(H)].

A safe harbor 401(k) plan is deemed to automatically meet the top-heavy requirements of IRC §416(g)(4)(H) where there are no other contributions other than either:

  • a nonelective contribution equal to at least 3% of each eligible non-highly compensated employee’s (non-HCE’s) compensation (a “safe harbor nonelective contribution”); or

  • a matching contribution that satisfies certain minimum amount and rate conditions (a “safe harbor matching contribution”).

However, matching contributions are not considered safe harbor if the rate of matching contributions for an HCE at any rate of elective contributions is greater than that for a non-HCE who is eligible to make elective contributions.

Also, a plan does not meet the requirements of a safe harbor design if, under the terms of the plan, a non-HCE is eligible to make elective contributions but is not eligible to receive either a safe harbor nonelective contribution or a safe harbor matching contribution.


Wait A Minute, Inc. (WAM) established a safe harbor 401(k) plan for 2017 that provides for safe harbor matching contributions. Employees are permitted to make employee salary deferrals to the plan immediately upon commencement of employment, but are not eligible for matching contributions until they have completed one year of service with WAM. Consequently, newly hired non-HCEs who defer into the plan will not be eligible to receive any matching contributions until they have completed one year of service.

Since this will result in a greater rate of matching contributions for HCEs than for non-HCEs, the matching contributions do not meet the safe harbor requirements. Furthermore, since all eligible non-HCEs under the plan do not receive safe harbor nonelective contributions or safe harbor matching contributions, the matching contributions made under the plan do not satisfy the safe harbor requirements.

Therefore, the plan is subject to the top-heavy rules for 2017.


A plan sponsor that designs a 401(k) safe harbor plan with dual eligibility must be aware of the potential consequences related to the top-heavy requirements.

The Learning Center Resource Desk is staffed by the Retirement Learning Center, LLC (RLC), a third-party industry consultant that is not affiliated with Columbia Threadneedle. Any information provided is for informational purposes only. It cannot be used for the purposes of avoiding penalties and taxes. Columbia Threadneedle does not provide tax or legal advice. Consumers consult with their tax advisor or attorney regarding their specific situation.

Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by Columbia Threadneedle.

Columbia Threadneedle Investments (Columbia Threadneedle) is the global brand name of the Columbia and Threadneedle group of companies.

©2017, Columbia Management Investment Advisers, LLC. Used with permission.


All comments
Tim Guilford
3 years 6 months ago
There can be testing issues in a plan with dual eligibility and a Safe Harbor component. The contributions to the highly compensated could be curtailed if the plan fails the testing. Since new employees would not be getting the Safe Harbor contribution right away, the Safe Harbor protection can fail.