Yes, the participant's safe-harbor contribution may be based on the compensation earned while an eligible participant instead of using a full year's compensation. However, for this to occur the plan document must limit the compensation computation period to compensation earned while an eligible participant.

To illustrate, if a participant is hired April 28, 2003 with immediate eligibility for elective deferrals, but the plan required one-year of service for the safe-harbor contribution and has a quarterly entry date for the safe-harbor contribution. The employee would satisfy the one-year of service on April 27, 2004. The next entry date would be July 1, 2004. If the plan had compensation computation period of compensation while a participant, the safe-harbor contribution would be based on compensation for the period from July 1, 2004 to December 31, 2004.

CAVEAT: Although the above plan design is allowed under the regulations, it will not be exempt from the top-heavy rules. We addressed this issue in the attached link. While not previously stated, Revenue Ruling 2004-12 makes it clear that a plan does not satisfy the top-heavy exemption if it has different a longer eligibility requirement for the safe harbor contribution than for elective deferrals.