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Discretionary Matches and Safe Harbor 401(k) Plans


katieinny

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A plan has a 3% fixed contribution under a Safe Harbor Plan, so no ADP test. The ER will also provide a discretionary match. I've been given conflicting information as to whether the discretionary match can be a Safe Harbor match to avoid the ACP test. Both are reliable sources. One says yes, the other says no. I need a tie-breaker.

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Per the 2001 401(k) answer book, question 2:152:

A plan that satisfies the ADP safe harbor (i.e., your 3% nonelective) also satisifes ACP as long as one of the following three scenarios applies (I only include the applicable one):

1) The Plan provides non-safe harbor matching contributions and a) the matching contributions are not made with respect to compensation in excess of 6% of compensation, b) the matching contribution does not increase as the rate of deferrals increases, c) at any rate of deferrals, the rate of matching contributions that would apply to any HCE who is an eligible emlpoyee is no greater than the rate of contributions that would apply to an NHCE who is an eligible employee and who has the same rate of deferrals.

Austin Powers, CPA, QPA, ERPA

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I thought the only"cap" for a plan with a stated match was that you could not match anything above 6% deferred. Therefore if you stated the match in your doucment as 100% of the first 6% deferred you would be still be o.k. for safe harbor.

However, a discretionary match is subject to two caps. The 6% cap discussed above and also the cap that a match cannot exceed 4% of comp. Therefore the match above would not be o.k. if it were a discretionary match.

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Agreed!

The 4% hitch is buried a little further down on the page!

non-safe harbor Nondiscretionary match (i.e. wording included in plan doc) - limit is no compensation in excess of 6% of wages may be considered.

Non-safe harbor discretionary match - same 6% limit as above. However in addition, contributions that eqyate to >4% of earnings are not allowed regardless (i.e 25% of 20% = 5% of Comp, so no go).

Right?

Austin Powers, CPA, QPA, ERPA

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Now I am confused --A discretionary mtach of 100% on the first 6% deferred would mean that for anyone wo defers over 4% of commpensation, you would be making a match in excess of 4% of that participant's compenstion.

As I think we both agree, you cannot make a discretionary match in excess of 4% of compensation if you do not want to have to run the ADP test in a safe harbor plan.

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The 6% limit deals with what you match, not a dollar limit. You can match 25% of the first 6% of compensation. This passes the 6% limit because your formula does not match on a percentage greater than 6% of comp. Since this would result in a participant receiving a total of 2% of comp match, it would be lower than the 4% limit.

In essence, you could have a stated match formula of 300% of the first 6% of compensation and still pass ACP safe harbor.

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As long as the match formula is uniform and given to NHCEs as well, there is no reason that it would not be okay.

An employer might wish to max out to their $40,000 using a safe harbor match of this type. I have yet to see someone want to do it but it is certainly permissible.

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No one brought up the Fixed Match!

If the only one to defer happens to be an HCE, that HCE can receive a $40K contribution under a Safe Harbor 401(k) and the contributions qualify for the Safe Harbor and is exempt from the Top Heavy Rules! THe HCE gets to $40K with:

1. Employee Deferrals

2. A 3% Non-Elective or a Basic Match or an Enhanced Match

3. A discretionary Match

4. A Fixed match

Only the Discretionary Match can be subject to allocation requirements and a vesting schedule.

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ok, this is the way I think of it.

To satisfy ADP safe harbor, you have to provide

1. Basic Match

2. enhanced match

or

3. Safe harbor Nonelctive Contribution

(which I affectionately call SHNEC just cuz I can't stand typing the silly words over and over)

at this point, you have done nothing to satisfy ACP safe harbor.

note that the enhanced match could be anything, as long as as it is a better deal than the basic match in all possible scenarios. Therefore, it could be greater than 100%, it could be 100% up to 8%, etc.

now you have to satisfy ACP safeharbor.

if you provided the Basic Match, you have satisfied ACP safe harbor.

if you provided the enhanced match, you MIGHT have to run the ACP test, if the enhanced match was greater than 6% of deferrals. (or if there are after-tax contributions)

if you provided the SHNEC, then to satisfy ACP safe harbor you need some sort of match. the discretionary match is limited to 4% of compensation. so suppose you provide a 66.66% match up to 6% deferred. This satisfies the cap on deferrals (no more than 6%) and the maximum match is 66.66% * 6 = 4% of compensation which satisfies the limit on comp.

If I remember correctly if you exceed the limits, then you run the ACP test either on just the amounts exceeding the limit, or, you could test on all match.

If no discretionary match is provided, then there is no ACP test, no safe harbor needed, etc. Note: the SHNEC does not satisfy ACP safe harbor, the ACP simply doesn't exist.

Now, can you provided the Basic Match or Enhanced match and still provide the discretionary match? yes, but why would you, it just confuses my simple brain. and those limits will kill you.

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I find this an amazing thread from the perspective of why does all of the legislation/guidance in the employee benefits area result in even the pros standing around and scratching their collective heads and asking "what does this mean." And where is the statutory underpinning for the 4% limitation on discretionary contributions? And why did the IRS make the GUST compliance dates so complicated that there is still discussion on proper certification and amendment adoption dates? And what were the rules in Rev. Rul. 98-1? And whose idea was the HIPAA EDI and privacy requirements? I think I will stop now.

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  • 12 years later...

many years later on this thread, and i have a question, which I don't even know if it makes sense:

safe harbor plan makes the adp safe harbor basic matching contribution.

can they in addition make an acp safe harbor match which is essential the same exact match as the adp safe harbor match, essentially resulting in combined match up to 8%, all based on up to 6% of compensation?

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I cautiously say yes.
you can't have allocation conditions on the additional match.
if it is discretionary, then it must be capped at 4% of comp.
e.g. you could have 66% of the first 6% deferred.
if discretionary or required match it is limited to 6% deferred.

the ERISA Outline book uses an example of a basic match and an additional match of 30% on the first 5% deferred

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A plan is projected to need a Safe Harbor in 2015 so that the owners can defer their $18,000 in 2015. The match has always been allocated on a deferral ratio and has been almost 100% of the deferral. The NHCE deferring 20% of comp has been joined by two new participants deferring a more "normal" average of 6%.

Can I have a Non-Elective 3%, plus a discretionary PS contribution subject to vesting (which may approach 100% of the deferral amounts)?

I think I know that the amount of match above a certain amount (4% of comp, 6% of deferral - or so) leads to ACP testing.

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unclear exactly what is being asked. are you implying you have a ps contribution that is related to the amount deferred? I guess you could have, if each person was in their own group, but that wouldn't be a safe harbor contribution, and it would be subject to a(4) testing (most likely cross testing) in order to pass.

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