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Safe Harbor 401(k)

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#1 Guest_named_Mac Lewis_*

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Posted 02 September 1998 - 11:40 AM

Is anybody starting to market and/or comment in the national mass or industry media on the new (1/1/99) safe harbor 401(k)? I would appreciate any news, web page cites, and opinions. Thanks.

#2 Guest_named_Jon Chambers_*

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Posted 10 September 1998 - 01:06 AM

Great question. I have a plan that intends to adopt the 3% across the board safe harbor on or about 1/1/99. How prevalent do people think the safe harbors will be, and which (matching or across the board)will be more popular?

#3 Guest_named_Chip Brown_*

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Posted 26 September 1998 - 01:14 AM

It's gonna be great. Whether match or across the board will probably depend on the participation levels and demographics. I met with an employer yesterday who said (brilliantly, I thought) that an across the board allocation would get the fence-sitters more interested in the plan. He has a lot of low paid employees who probably can't afford to participate at any level. Once they start getting benefit statements (they have individual accounts) and start making investment decisions, they may just ante up a couple of bucks to watch their accounts grow.

#4 Guest_named_LCARUSI_*

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Posted 26 September 1998 - 01:26 AM

I have to differ with Chip - and this is of course only an opinion. I think many/most employers will be reluctant to substantially increase their level of matching (or profit sharing) contributions to satisfy the safe harbor rules. Clients with whom I've spoken have no interest in doing so - even if it would eliminate need for k/m testing.

You know what I think is really unfair? I have a client with a very generous DB plan and a 401(k) Plan (25% match first 6%). This client will not increase the match. They can take no credit for the substantial funding of the DB plan toward the safe harbor requirements of the 401(k) Plan. They would have to curtail/eliminate the DB Plan to take the 401(k) Plan over the safe harbor threshhold. That's not right.

#5 Guest_named_richard_*

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Posted 26 September 1998 - 01:56 AM

I've been wrong before, but, despite the hype, I think the new safe harbor 401k will have limited appeal.

From a cost standpoint, the employer will measure the additional cost of the 3% match over his current level of match, as well as the cost of full and immediate vesting.
Offsetting this will be the consulting (or internal) cost saving of not having to perform ADP/ACP testing and post-year-end corrections; however, this is probably a small administrative cost compared to the cost of the match. (Also, the post-year-end corrections will become easier now that we can use the prior year's nonHCE ADP/ACP levels to determine the current year's maximum HCE ADP/ACPs.)

From an HR standpoint, they will have to decise if the removal of a vesting schedule circumvents the appeal of "the longer you stay with us, the more vested you will become," which HR typically likes.

One key element in the safe harbor's favor is not the cost elimination of the ADP/ACP testing, but rather freeing up the HCEs from any ADP/ACP testing. This can have important HR implications, since HCEs are an important group within the company.

Bottom line -- my best guess is .. probably not tremendous appeal, but it's another design that we ought to analyze for our clients.

(Side note. LCARISI's comment about it being unfair to not be able to take into account the DB cost is correct. Unfortunately, there are many instances where a combination of 401k and DB plans are not "integrated" in the IRS's rules -- in particular, the mandatory disaggregation in the 401(a)(4) rules.)

#6 Guest_named_Ervin Barham_*

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Posted 29 September 1998 - 09:27 AM

I'm finding that the safe harbor design has appeal to smaller employers where participation has not been good or in start-up situations. It should (although I haven't tested it too much) have some appeal in a cross-tested situation.

For the larger employers, the offset of the vesting schedule seems to be a negative.

#7 Guest_named_LCARUSI_*

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Posted 29 September 1998 - 10:08 AM

Ervin -

I'm not sure I understand your comment:

"It should (although I haven't tested it too much) have some appeal in a cross-tested situation."

Could you elaborate? Thanks.

#8 Guest_named_Ervin Barham_*

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Posted 30 September 1998 - 06:34 PM


Sorry for the vagueness. This is an idea being tossed about from various sources to use the safe-harbor to allow HCE's/owners to defer a higher amount without worrying about ADP/ACP. Since the discrimination test under 401(a)(4) only takes into account the 401(k) amounts in the average benefits portion of the test, "theoretically" this would lower the profit sharing contribution for the HCE, thus making it easier to pass the 401(a)(4) tests as well.

I have not tested it on any live plans, although I see no reason why it should not work.

#9 Guest_named_boetgerinc_*

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Posted 16 October 1998 - 01:34 AM

If an employer adopts a safe-harbor matching formula then there is absolutily no incentive for the employer to have anyone (other than the HCE's) join their plan.

Think about it, if the employer can keep enrollment down, their matching contribution may be less - and they don't have to worry about testing. Do you think any employers will have 401(k) meetings during work time anymore? I know one employer who is going to educate their employees about the benefits of a Roth IRA, so hopefully they will save on their own, outside of the plan (and hopefully not save additional money inside the plan). We all know that not taking advantage of the employer match is crazy - but this is our business. The average particpant really needs educated, which the may no longer get.

In some cases, I really think that the safe-harbour plans may do more harm than good.

Also, if you go with the 3% across the board contribution - does this also satisfy the top-heavy minimum contribution for top heavy plans?

[This message has been edited by boetgerinc (edited 10-16-98).]

#10 Guest_named_JB2_*

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Posted 16 October 1998 - 05:03 PM

I think part of the incentive with the match is to encourage participation to reduce top-heavy percentage. If only your key person participates, then you will have to make an additional contribution.

I believe the 3% nonelective can be used for top-heavy.

#11 Guest_named_LCARUSI_*

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Posted 16 October 1998 - 05:31 PM

I agree with boetgerinc that there will be no incentive for an employer to encourage NHEs to participate.

However, there is a notice requirement and at a minimum the employer must give a notice to all employees before the beginning of each plan year.

#12 Guest_named_jkirschbaum_*

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Posted 16 October 1998 - 07:46 PM

I am an in-house benefits attorney and our admin people have been pushing this option strongly. We have had two subsidiaries that have adopted their own plans. One has gone with the safe-harbor, the other has not. The one that has not wanted to emphasize variable pay. It left some match in the 401(k) but put what would have been needed in the safe harbor to current cash. It drove the admin people crazy! The company was willing to pay the money (the vesting did not bother them), they just wanted to be able to call it a bonus instead of a match.
The other subsidiary thought it was a good idea and adopted it to make life easier.

The point is, the decisions may have nothing to do with costs or other measurable rationale.

#13 Guest_named_pdall_*

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Posted 21 October 1998 - 11:37 PM

safe harbors are the way to go with closely held or small companies whose hce's are limited every single year by poor participation (can't pass k/m test); and therefore can't get their 10K in. i have several clients this will work for - they will be able to go from 4+-% to the full 6.25% and not worry about k/m testing. Since most of these clients make a match anyway, most of them similar in amoutn to what is required in the qmac, then this is easily the best way to go for these clients.
One of the other great benefits is the ability to switch from qnec to qmac from year to year, within the notice guidelines.

#14 Guest_named_ndt123_*

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Posted 22 October 1998 - 09:15 AM

Most small employers don't offer a match that is equal to the safe harbor (we've looked at 750+ with between 20 and 100 participants).

Also, the previous post made mention of a Notice that allows plans to switch back and forth between qmacs and qnecs. Is this new? As far as I know, no guidance has been released.

#15 Guest_named_MWeddell_*

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Posted 22 October 1998 - 01:46 AM

The notice requirement is not new, but the IRS hasn't issued any guidance yet on the safe harbor contribution issues. They expect to do so before the end of 1998 still. One hopes they'll issue a model notice.

We see little interest in going to the safe harbor contribution among the size clients we talk with (about 500 employees and larger). Reasons for not putting in the contributions are of course the cost and the lower cost of alternatives (more creative allocation of qualified nonelective contributions, splitting the plan into two to improve test results and other testing options, or simply more effective participant communications).

Responding to a different comment on this topic, it's possible that one could use the 3% of pay nonmatching contribution in a floor/offset arrangement with a d.b. plan, but I'd wait until IRS guidance comes out before proceeding with anything too aggressive. Potentially, the 3% of pay contribution can satisfy the safe harbor requirement and serve to other purposes too.

#16 Guest_named_Phil L_*

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Posted 22 October 1998 - 03:15 PM

Has anyone seen a sample notice that can be used to satisfy the notice requirements for the 401(k) safe harbor? I would be very interested in seeing what others have done. Thanks.

#17 Guest_named_Dawn Hafner_*

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Posted 30 October 1998 - 11:30 AM

I would also be interested in any sample notifications for safe harbor 401(k) plans. Has anyone seen any?

#18 Guest_named_pascarp_*

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Posted 30 October 1998 - 01:42 PM

We are a fairly large plan sponsor (12,600+ active and 1,500+ retiree/deferred participants) going safe harbor on 1/1/99. Our active participation rate is hovering around 90%. Since our match already met the safe harbor criteria and our turnover is fairly low (<3%), we viewed the move to safe harbor in terms of the "cost" of losing the forfeitures to offset future co. match vs. the projected "benefit" of additional tax-deferral to our mid-level HCEs (who each year complained of being 'penalized' by not being able to reach the $10K limit).

From a PR standpoint, this is viewed as a progressive 'win' for our Corp. Benefits group.

#19 Guest_named_Dave Baker_*

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Posted 01 November 1998 - 12:32 AM

The IRS notice addressing the safe harbor 401(k) plan design is now online on BenefitsLink, at http://www.benefitsl...tice98-52.shtml

#20 Guest_named_pdall_*

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Posted 02 November 1998 - 01:01 PM

I have scanned notice 98-52 and didn't see anything regarding whether the employer can also make additional nonelective contributions if he wants to, if he has elected and made the 3% qnec or the qmac, as required.

It seems that it would not be fair to restrict an employer from contributing the 15% max because he now wants to take advantage of the safe harbor to bypass the adp, (so that he can personally defer 10k).