Not everyone who participates in the workforce serves an employer on a permanent, full-time basis. Examples may include seasonal, contingent, part-time, or internship work relationships. Most qualified retirement plan documents allow an employer to tailor a plan to meet its specific needs, including defining the eligibility requirements for employees to enter and participate in the plan. Beyond statutory exclusions — certain nonresident aliens and union employees — and requiring that a plan’s age and service conditions be met, an employer may, under certain conditions, exclude specific business classes of employees — interns for example. The employer may do so if the classification to be excluded is reasonable and the plan meets coverage requirements under the ratio percentage test, or — if a classification is not considered “reasonable” — the plan can satisfy coverage requirements through the average benefits test. The plan document must also allow class exclusions, generally a non-standardized plan document. Importantly, “part-time” per se is generally not regarded as a permissible excludable employee class.
While it may be possible to exclude a specific employee class for some or all benefits under a retirement plan, when it comes to 401(k) safe harbor benefits there are special rules. If a class of employees is eligible to make elective salary deferrals into the plan — regardless of whether they are excluded for other plan benefits, or whether they actually defer into the plan — then employers generally must also permit them to receive safe harbor matching or nonelective contributions. This is because Treasury Regulations (Treas. Regs.) require that all non-highly compensated employees (non-HCEs) eligible to make elective salary deferrals receive the safe harbor matching (Treas. Reg. 1.401(k)-3(c)(1) or nonelective (Treas. Reg. 1.401(k)-3(b)(1)) contribution.
Employers may actually exclude highly compensated employees (HCEs) from receiving safe harbor matching or nonelective contributions, but this is not commonly done, given the reality that plan provisions that discriminate against HCEs are generally not adopted. As a practical matter, it is likely that most employees who are not permanent full-time employees — such as interns — will be non-HCEs, and therefore would be eligible to receive the safe harbor contribution if eligible to defer into the plan.
If the employer fails to provide the safe harbor matching or nonelective contribution to a deferral-eligible class of non-HCEs, the plan will be considered to have an operational failure. The options to correct this type of failure will depend on whether the employer failed to follow other safe harbor requirements, as detailed in Treas. Regs. 1.401(k)-3 and 1.401(m)-3. If the failure is limited to failing to provide a safe harbor contribution to eligible non-HCEs, the plan may consider correcting by making the appropriate safe harbor contributions, adjusted for earnings, through the Self Correction Program (SCP) within the IRS Employee Plans Compliance Resolution System (EPCRS). If the employer also failed to provide a required safe harbor notice, the plan may consider a correction using either self-correction procedures or under the Voluntary Correction Program (VCP), with IRS approval, to ensure that there will be no loss of safe harbor benefits. These safe harbor benefits include being deemed to satisfy ADP and ACP testing and top-heavy minimum contribution requirements. (It should be noted that by making certain additional employer contributions in addition to ADP and ACP safe harbor contributions — such as making an employer profit-sharing contribution, or an additional non-safe harbor matching contribution — top-heavy contribution requirements will no longer be deemed satisfied.)
