Safe Harbor 401(k)
Posted 02 September 1998 - 11:40 AM
Posted 10 September 1998 - 01:06 AM
Posted 26 September 1998 - 01:14 AM
Posted 26 September 1998 - 01:26 AM
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.
Posted 26 September 1998 - 01:56 AM
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.)
Posted 29 September 1998 - 09:27 AM
For the larger employers, the offset of the vesting schedule seems to be a negative.
Posted 29 September 1998 - 10:08 AM
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.
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.
Posted 16 October 1998 - 01:34 AM
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).]
Posted 16 October 1998 - 05:03 PM
I believe the 3% nonelective can be used for top-heavy.
Posted 16 October 1998 - 05:31 PM
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.
Posted 16 October 1998 - 07:46 PM
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.
Posted 21 October 1998 - 11:37 PM
One of the other great benefits is the ability to switch from qnec to qmac from year to year, within the notice guidelines.
Posted 22 October 1998 - 09:15 AM
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.
Posted 22 October 1998 - 01:46 AM
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.
Posted 22 October 1998 - 03:15 PM
Posted 30 October 1998 - 11:30 AM
Posted 30 October 1998 - 01:42 PM
From a PR standpoint, this is viewed as a progressive 'win' for our Corp. Benefits group.
Posted 02 November 1998 - 01:01 PM
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).