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Safe harbor matching contribution in the ESOP (not a KSOP)


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I have a client who is considering using the ESOP for safe harbor matching contributions. Other clients have used their ESOPs for safe harbor nonelective contributions, but I don't yet have a non-KSOP making matching contributions in the stand-alone ESOP.

The regs show that this is permissible. §1.401(k)-3(h)(4): "Safe harbor matching or nonelective contributions may be made to the plan that contains the cash or deferred arrangement or to another defined contribution plan that satisfies section 401(a) or 403(a). . ."

The ASPPA DC-2 book states, however, "If this option is used [i.e., contribution to a different DC plan] it will typically involve the safe harbor nonelective contribution." (as opposed to the safe harbor matching).

My experience so far lines up with the comment in the DC-2 book. But why is that? Shouldn't be very difficult to calculate the proper match based on the 401(k) deferrals, and designate that portion of the ESOP contributions accordingly. Obviously there are other issues to deal with, but do any of you have any experience about why a safe harbor match might be a bad idea as opposed to a safe harbor nonelective?

Thanks!

Marcus

Marcus R. Piquet, CPA

American ESOP Advisors LLC
5995 Brockton Ave Fl 2, Riverside, CA 92506-1833
(951) 779-1124 (v) (951) 346-0896 (fax)

mpiquet@AmericanESOP.com

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Why associate "typically" with "bad idea"? A safe habor match with typically be made to the plan with the CODA (and therefore not typically made to another plan). There is less affinity between a nonelective contribution and a CODA, so when a safe harbor contribution is made to another plan, it will "typically" be a nonelective contribution. Sponsors with plans that have nonelective contributions may simply adjust them if necessary and use them as the safe harbor contribution to go with the CODA in the separate CODA plan. Sponsors "typically" do not have matches in a plan other than the CODA that is matched, so when they adjust the pre-existing match (if necessary) to achieve the safe harbor, the match stays in the same plan just as the nonelective safe harbor contribution stays in the same plan as before safe harbor. I read "typically" as empirical rather than qualitative. It is more about the statistical affinity of match and CODA than issues.

But it never hurts to ask.

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