Safe Harbor Nonelective Plus Additional Nonelective

[AndyH]

http://www.geocities.com/SoHo/Den/6460/1999mar31.htm

[austin3515]

Restructure the Plan's into two component plans:

Plan 1: Employees getting SHNEC only,

Plan 2: Employees getting SHNEC and integrated contribution.

Both are design based safe harbors.

Plan 1 and Plan 2 must pass coverage independently.

Another chapter is closed...

[Blinky the 3-eyed Fish]

I don't think your proposed solution resolves anything. You still have the only person above the TWB is an HCE. You ran through the math to show that the people below the TWB have a lower contribution percentage imputing permitted disparity. So that leaves your restructuring to mandate that the HCE is the only one in his restructured plan. That doesn't pass coverage though.

[Kevin C]

Interesting thread!!! Sorry, but I feel the need to stir the pot just a bit more.

1. With the 3% non-elective safe harbor contribution included in the general test, doesn't Notice 98-52 prohibit you from using imputed permited disparity in the general test?

2. Aren't standardized AND nonstandardized M&P plans required to use 401(a)(4) safe harbor allocation methods? The situation being discussed easily fits into the adoption agreements for the both the standardized and NS protoype documents we use.

When the logic starts telling us that we have to 401(a)(4) general test some plans using standardized prototypes, it seems a good time to step back and look at the big picture. Did the IRS make a huge mistake in how they integrated safe harbor 401(k) provisions into the M&P program? Or, did we miss something in getting here? I have a difficult time accepting the idea that we can have a standardized prototype plan that can possibly fail 401(a)(4).

I'm starting to wonder if the IRS considers the 3% non-elective safe harbor contribution as a part of the CODA. Consider the following:

401(k)(12)(A) IN GENERAL. --A cash or deferred arrangement shall be treated as meeting the requirements of paragraph (3)(A)(ii) if such arrangement --

401(k)(12)(A)(i) meets the contribution requirements of subparagraph (B) or ©, and

401(k)(12)(A)(ii) meets the notice requirements of subparagraph (D).

[Blinky the 3-eyed Fish]

Quick comments

1. You can't impute permitted disparity on the SHNEC, but it doesn't say you can't impute permitted disparity on other contributions just because you have SHNEC.

2. Nonstandardized prototypes don't have to be safe harbors. Now I don't work with standardized DC prototypes, but it sounds like there is something missing.

I'm not sure what you mean by the CODA comment. If you are saying SHNEC should be classified as a deferral and not a nonelective contribution, well then I disagree.

[Kevin C]

I'll try to be more specific.

From Notice 98-52:

B. Use of Safe Harbor Nonelective Contributions to Satisfy Other Nondiscrimination Tests

A safe harbor nonelective contribution used to satisfy the nonelective contribution requirement under section V.B.2 may also be taken into account for purposes of determining whether a plan satisfies §401(a)(4). Thus, these contributions are not subject to the limitations on qualified nonelective contributions under §1.401(k)-1(b)(5)(ii), but are subject to the rules generally applicable to nonelective employer contributions under §401(a)(4). See §1.401(a)(4)-1(b)(2)(ii). However, pursuant to §401(k)(12)(E)(ii), to the extent they are needed to satisfy the safe harbor contribution requirement of section V.B, safe harbor nonelective contributions may not be taken into account under any plan for purposes of §401(l) (including the imputation of permitted disparity under §1.401(a)(4)-7).

My understanding of the general test is that all employer contributions are tested together in total. Are you saying that you apply permitted disparity to one piece of the total and not the other in the same test?

From Rev Proc 2000-20, Section 3:

.09 Changes to General M&P Plan Requirements --This revenue procedure makes several changes and clarifications to the requirements that apply to all M&P plans. Significant among these are the following:

1 Rev. Proc. 89-9 and Rev. Proc. 89-13 prohibited the issuance of opinion and notification letters for plans that contain or may contain multi-tiered benefit structures. This prohibition has been reformulated as a general requirement that the allocation or benefit formula in a nonstandardized M&P plan must satisfy the following uniformity requirements of the regulations under §401(a)(4) pertaining to safe harbor plans. In the case of a nonstandardized defined contribution plan, the allocation formula must be a uniform allocation formula, within the meaning of §1.401(a)(4)-2(b)(2) of the regulations, or a uniform points allocation formula, within the meaning of §1.401(a)(4)-2(b)(3)(i)(A). In the case of a nonstandardized defined benefit plan, the benefit formula must satisfy each of the uniformity requirements of §1.401(a)(4)-3(b)(2). In addition, each nonstandardized plan must give the employer the option to select total compensation as the compensation to be used in determining allocations or benefits and each nonstandardized defined benefit plan must automatically or by option allow the adopting employer to satisfy one of the design-based safe harbors described in §1.401(a)(4)3(b)(3), (4), and (5). (Of course, standardized plans and nonstandardized safe harbor plans continue to be required to satisfy design-based safe harbors described in the regulations under §401(a)(4).) Thus, for example, an M&P plan, other than a uniform points defined contribution plan, may provide for disparity in the rates of employer contributions allocated to participants' accounts provided the plan satisfies §401(l) in form. Exceptions to the uniformity requirements are provided for Davis-Bacon plans, plans that would fail to satisfy the requirement only because of the plans' top-heavy provisions, and plans that have continued to apply certain limitations under the Code that were repealed by GUST.

I read that to mean that non-standardized prototypes are required to use 401(a)(4) safe harbor allocation methods. I also noticed that the prototypes we use do not have general test language in the base document. Most of our plans use prototype documents.

My comment about about the 3% SH contribution possibly being considered a part of the CODA was not intended to imply that they are deferrals or that they should be treated as such. With mandatory disaggregation of 1) CODA, 2) match and 3) everything else, I'm just wondering if the IRS thinking is that the 3% SH belongs in the CODA portion for testing, not in the portion for everything else. It may be a little far fetched, but it would eliminate the problem with some standardized prototypes having to be general tested. If the IRS didn't miss the boat on this one, they had to have a reason for thinking it isn't a problem.

[AndyH]

OK, my turn.

No, you don't throw a SHNEC in with another employer contribution for general testing. Your understanding is incorrect. You must break out the SHNEC for the permitted disparity calculation, as Blinky spouted.

I think you are correct about DC M&P plans, there technically are no "cross tested" or tiered prototypes. I am not sure about non-safe harbor DB prototypes.

I also have no idea what you are saying about a CODA.

[Blinky the 3-eyed Fish]

My mistake on the nonstandardized prototypes. We only deal with these on takeover situations and I realized that while cross-testing on some of the plans was set up using these documents, they were submitted for individual letters.

[Kevin C]

We deal mostly with prototype documents, both standardized and non-standardized.

The standardized prototype we use allows requiring 500 hours OR employed on the last day of the year to receive the PS contribution, even if a 3% SHNEC is used. So now we have an IRS approved standardized prototype that may not have a 401(a)(4) safe harbor allocation method. But, having a 401(a)(4) safe harbor allocation method is one of the requirements to be a standardized prototype. I may be overreacting, but I think this is a huge problem, unless the IRS has rationalized another way to look at this issue.