Safe Harbor Match and discretionary match

[rcline46]

As I understand 401(k)(11)(B)(iii), if you have a Safe Harbor match in a plan for NCEs only, you cannot have ANY discretionary match which goes to HCEs only.

Another consultant is telling my client that you can do the basic Safe Harbor match for NCEs only and a discretionary match for HCEs only as long as it does not exceed 4% of pay. Of course they have not yet give the code/reg cite which permits this.

Is there another cite other than the one above to 'prove' you cannot do this? Or is it possible, and if so, where would I find the rules?

I know that the portion of a QMAC used to satisfy ADP testing cannot again be used in ACP testing. Is there a cross reference to this in the Safe Harbor regs I am missing?

Thank you.

[Guest lhinson]

I think that would fall under the requirement for additional discretionary matching contributions that the rate of match for an HCE is not greater than for a NHCE who is deferring at the same rate.

[Tom Poje]

well here goes my best shot at it

1.401(k)-3©(1) [since it is in the 'k' this would be ADP safe harbor

safe harbor is satisfied if a QMAC is made to each eligible NHCE that satisfies basic match or enhanced match. in addition, HCEs cannnot receive at a higher rate.

ok, so only NHCEs get, so ADPsafe harbor is satisfied.

now ACP safe harbor 1.401(m)-3

conditions satisfied if it meets ADP safeharbor 1.401(m)-3© with the following additions

(2) matching rate doesn't increase - [My thoughts - thus if discretionary went to HCEs only at 100% up to 4% you fail if basic match was used]

(3)(i) enhanced match capped at 6% deferred

(ii) discretionary capped at 4% of comp

(4) ratio of matching contributions of HCEs is not greater than that of NHCEs

now VIII D of 98-52 says you can not use QNECs or QMACs that are needed to satisfy ADP safe harbor. now, the crux of the matter VI (1) of 98-52 says ACP is satisfied if Basic match is only match provided

(2) says ACP satisfied if enhanced match capped at 6% and no other match

(3) says other matches can be made and (i) in aggregate dont exceed 6% of comp

(ii) rate doesnt increase

(iii) hces dont receive at a higher rate

now VIII F 2 says if you satisfy ADP safe harbor but fail ACP you must test

VIII F 3 adds the special rules which says you can disregard all matching contributions if

(1) ACP safe harbor is satisfied (I guess this applies to plans that provide match on after tax contributions)

or

(2) exclude match contribution that do not exceed 4% of comp (if basic or enhanced match is satisfied)

except as provided under VIII D QNECs [i read SHNECs greater than 3%] may be used.

so VIII D says you cant use the QMACs/QNECs if used in ADP safe harbor, and VIII F 2 seems to say you can use the match under the special rule. Gotta love that! VIII D only uses one example, that of a SHNEC at 7%, you cant use the first 3%. VIII F 2 appears to reference that.

[MWeddell]

Tom Poje,

I got lost reading your answer. Do you think the plan design in rcline46's post satisfies the 401(k) and 401(m) safe harbor rules? Also, why would Notice 98-52 be relevant at all if we're talking about 2006 when the final 401(k) / 401(m) regulations definitely are effective?

[Tom Poje]

I happen to like 98-52 since I think it reads easier than the regs.

and I don't believe the regs have really changed anything.

they did 'clarify' and I am using the IRS lingo saying clarify, that to be a safe harbor discretionary match one had to look at eligible to defer rather than eligible for match.

what could be described in the SPD was also modifed slightly, but other than that I think one could still reference 98-52.

shoot, I got lost just trying to write the different cites.

so, at best I conclude the following

1. plan passes ADP safe harbor requirements

2. plan does not pass ACP safe harbor, so a test must be performed.

now, when testing what happens?

VIII D seems to say you cant use the QNEC or QMAC but

VIII F talks about special rules for testing and that seems to say you can include the match.

1.401(m)-2(a)(5)(iv) says if a plan satisfies ADP safe harbor but does not satisfy ACP is permitted to exclude matching contributions that do not exceed 4% of comp. since one is permitted to exclude those amounts it would seem to say one could include them.

I will go no further than that - I leave it up to whomever to interpret the regs as to what they say, I won't run a plan that has basic match for NHCEs and then a discretionary for HCEs only (or even have eligibility restrictions on the discretionary) that is too goofy for me. I will send them to Mr. Cline.

[MWeddell]

Tom,

I guess I'm starting to make a habit of disagreeing with you. Why do you think that this does not satisfy the ACP test safe harbor if NHCEs are given a safe harbor match and HCEs are given a discretionary match? The HCE discretionary match can never be more favorable than the match given to NHCEs, cannot be greater than 4% of compensation, cannot have an increasing match rate as an eligible HCEs' deferrals increase, and cannot be made on deferrals or contributions exceeding the first 6% of compensation.

The fact that the HCE match is discretionary and the NHCE match are qualified matching contributions meeting the safe harbor requirements doesn't matter. Look at Treas. Reg. 1.401(m)-3(d)(4) (which is similar to Notice 98-52, Section VI.B.3(iii)). The phrase "matching contribution" sure seems to refer to all matching contributions, not just discretionary matching contributions. (See Notice 98-52, Section V.B.3. Ex. 5(a)(last clause) for an example where "matching contributions" quite clearly includes qualified matching contributions meeting the safe harbor requirement, not just the discretionary matching contributions.)

In short, this plan design in my opinion potentially can meet the ACP test safe harbor.

-- Michael

[Guest Pensions in Paradise]

Michael - I disagree with your statement that the discretionary match could never exceed the safe harbor match. The safe harbor match is 100% of the first 3% deferred, and 50% on the next 2% deferred. So if the discretionary match is 100% on the first 4% deferred, you've exceeded the safe harbor match.

[MWeddell]

Michael - I disagree with your statement that the discretionary match could never exceed the safe harbor match. The safe harbor match is 100% of the first 3% deferred, and 50% on the next 2% deferred. So if the discretionary match is 100% on the first 4% deferred, you've exceeded the safe harbor match.

I must not have expressed my view very well. What I meant was please suppose that the plan is drafted so that the various conditions I listed were met. In particular, suppose the plan is drafted so that the discretionary match given to HCEs can never be more than 100% on the first 3% of compensation deferred and 50% of the next 2% of compensation deferred.

If a plan were properly designed and drafted to meet that condition and the others listed in my prior post, I believe that one can allocate the discretionary match only to HCEs and the plan can still meet the 401(k) and 401(m) safe harbors.

[rcline46]

Well now, I am seeing this:

1.401a(4)-4(d) - Aggregating B,R,F can be done if one of the BRFs is more valuable. The SH match being mandatory and 100% vested is more valuable than the discretionary match. But the IRS does not issue letters on BRFs?

Notice 98-52 VIII D says throw away the SHMAC since it is used to satisfy ADP testing.

98-52 VIII F says we can ignore matching contributions up to 4%

Therefore - assuming the BRF is ok, and the discretionary matching contribution does not exceed 4% of pay, and the discretionary matching contribution formula does not match contributions in excess of 6% of pay and does not exceed the Safe Harbor formula chosen (basic or enhanced) then it is ok (e.g. 30% of deferrals up to 6% of pay).

I will strongly urge the client to submit the design to the IRS for their protection!!

[MWeddell]

But the IRS does not issue letters on BRFs?

I believe the IRS still includes approval that BRFs are nondiscriminatory if one fills out the approrpriate demos and asks for this level of approval in the determination letter application.

Notice 98-52 VIII D says throw away the SHMAC since it is used to satisfy ADP testing.

Paraphrasing this a bit more precisely, Notice 98-52, Section VIII.D says that the safe harbor contributions can't be used as QMACs and QNECs to satisfy other discrimination tests for the year. This doesn't contradict what I'm contending, that all matching contributions are not subject to the 401(m) test.

... then it is ok (e.g. 30% of deferrals up to 6% of pay).

One would actually be able to allocate as a discretionary contribution to HCEs up to 66-2/3% of the first 6% of pay deferred or up to 80% of the first 5% of pay deferred. Thanks for your agreement.

[rcline46]

MWeddell - I disagree on the levels you state IF the NCE Safe Harbor formula were the Basic Matching formula because at levels of deferral over 3% of pay, the NCEs are receiving 50% and in your example the HCEs would be receiving 66 2/3 or 80 %. This violates 401(k)(11) which states the HCEs cannot at any point receive a higher rate of match.

If the NCE formula was 100% to 4 then your examples would work.

[MWeddell]

MWeddell - I disagree on the levels you state IF the NCE Safe Harbor formula were the Basic Matching formula because at levels of deferral over 3% of pay, the NCEs are receiving 50% and in your example the HCEs would be receiving 66 2/3 or 80 %. This violates 401(k)(11) which states the HCEs cannot at any point receive a higher rate of match.

If the NCE formula was 100% to 4 then your examples would work.

I've considered the above post but I disagree with it.

I was indeed assuming that the basic matching formula for the safe harbor contribution was being used for the NHCEs.

Suppose 4% of pay is deferred. An NHCE would receive a match of 3.5% of pay. An HCE under the 66-2/3% of the 6% of pay formula would receive 2-2/3% of pay or an HCE under the 80% of the first 5% of pay formula would receive 3.2% of pay. Both of these rates are less than or equal to the 3.5% rate that the NHCE receives.

Now it is true that if one considers just the elective deferrals between 3% and 4% of compensation that the NHCE is receiving a lower match rate, but I don't read either Treas. Reg. 1.401(k)-3(c )(4) or 1.401(m)-3(d)(4) as regulating that comparison. One assumes that there's an NHCE contributing the same percentage of safe harbor compensation as the HCE and then compares the ratio of matching contributions to employee deferrals for the HCE to the same ratio for the NHCE. The regulations don't restrict what the marginal rate of match is (other than it can't increase because that would violate Treas. Reg. 1.4o1(m)-3(d)(2).

[Guest darrensoup]

As I understand 401(k)(11)(B)(iii), if you have a Safe Harbor match in a plan for NCEs only, you cannot have ANY discretionary match which goes to HCEs only.

Another consultant is telling my client that you can do the basic Safe Harbor match for NCEs only and a discretionary match for HCEs only as long as it does not exceed 4% of pay. Of course they have not yet give the code/reg cite which permits this.

Is there another cite other than the one above to 'prove' you cannot do this? Or is it possible, and if so, where would I find the rules?

I know that the portion of a QMAC used to satisfy ADP testing cannot again be used in ACP testing. Is there a cross reference to this in the Safe Harbor regs I am missing?

Thank you.

The answer to me is clear. I would say no. This would be considered an "other match" in addition to the ACP safe harbor match contribution. It is clear to me that you would have to perform an ACP test on the additional match contributions. Please note that to satisfy the ACP test safe harbor the matching contribution at any rate of elective contribution or after-tax employee contributions is not greater for any HCE than for any NHCE. code 401(m)(11)(B);Notice 98-52

[MWeddell]

Darrensoup,

As noted in the threads above yours, when one considers the safe harbor match for NHCEs and the discretionary match for HCEs, then as long as the discretionary match doesn't get too high then at no rate of safe harbor compensation deferred to the plan would a HCE receive a higher ratio of match to elective deferrals than would be true for an NHCE.

Perhaps your argument instead is that one cannot consider both types of match, the qualified matching contributions used to satisfy the safe harbor rules and the discretionary match, together when applying that rule. However, I believe I've already cited the authorities that apply the rule to just "matching contributions" which certainly would seem to include both types of match.

[Guest darrensoup]

Darrensoup,

As noted in the threads above yours, when one considers the safe harbor match for NHCEs and the discretionary match for HCEs, then as long as the discretionary match doesn't get too high then at no rate of safe harbor compensation deferred to the plan would a HCE receive a higher ratio of match to elective deferrals than would be true for an NHCE.

Perhaps your argument instead is that one cannot consider both types of match, the qualified matching contributions used to satisfy the safe harbor rules and the discretionary match, together when applying that rule. However, I believe I've already cited the authorities that apply the rule to just "matching contributions" which certainly would seem to include both types of match.

I believe that in this example the discretionary Match contribution would be considered an "other matching" contribution. I do believe that you must look at the discretionary match alone and in this case, yes the HCE are receiving a higher ratio of Discretionary Match to elective deferrals when compared to NHCE's. I still believe that an ACP test would be required on the Discretionary Match piece.

[Tom Poje]

I would agree with you mr. 'soup' - the only possible issue being whether you are allowed to include all the match made in testing/ one part of the regs says no, but then another part says, "ah, there is a special rule..."

conceivably if enough NHCEs did not defer then the plan would fail ACP testing as the ACP % would be very low.

If you are only allowed to test using the discretionary match, then the HCE would have a % but the NHCE would be at 0 and the whole argument ceases to exist because you would never do that.

[MWeddell]

Any citations? What language are you relying on? I'd love to know what I'm missing here.

[Tom Poje]

while if properly designed the HCE might not receive at a higher rate, I still do not see how you get to the point of satisfying ACP safe harbor if there is an eligibility condition on the discretionary match - thus it seems to me ACP testing is needed.

[rcline46]

ACP testing is necessary, but by ignoring matches not exceeding 4% of pay, there are now no matching contributions for HCE or NCE, so it passes. And that is the whole point of the process as it seems the regs are written.

[MWeddell]

while if properly designed the HCE might not receive at a higher rate, I still do not see how you get to the point of satisfying ACP safe harbor if there is an eligibility condition on the discretionary match - thus it seems to me ACP testing is needed.

No ACP testing is required if a plan satisfies the ACP safe harbor provisions except that one must still perform an ACP test on any employee after-tax contributions. Treas. Reg. 1.401(m)-1(b)(1)(ii) and 1.401(m)-3(j)(6). For simplicity's sake, let's suppose we are dealing with a plan with no employee after-tax contributions. As I read through the provisions of Treas. Reg. 1.401(m)-3, no where does it state that one fails to satify the ACP safe harbor provisions if there is an eligibility condition on the discretionary match. It's just not in there. There is a requirement (see 1.401(m)-3(d)(4) and also 1.401(k)-3(c )(4)) that matching contributions divided by elective deferrals for any HCE cannot be greater than the matching contrbiutions divided by elective deferrals for an NHCE deferring the same percentage of compensation, but that's not an obstacle here because it applies to "matching contributions" not to "other matching contributions."

There is no ACP testing required. If someone disagrees, please provide a citation to what provision in the ACP safe harbor provisions this plan design would fail to satisfy. The plan design I'm tallking about would allocate a basic safe harbor matching contribution to NHCEs and a discretionary match of no more than 4% of pay to HCEs, such as up to 80% of the first 5% of compensation or up to 66-2/3% of the first 6% of compensation. The discretionary contribution to HCEs could be allocated only to those HCEs employed on the last day of the plan year if desired.

[Tom Poje]

well, I read the following

Regs:1.401(m)-3(d)(4) Limitation on rate of match – … an employee is taken into account for purposes of this paragraph if the employee is an eligible employee under the cash or deferred arrangement…

The preamble for the propsed regs summed it up better. I have included it below. For whatever reason these comments were not included in the preamble to the final regs, but what they referenced in the regs remained the same.

The original interpretation was 'if someone is eligible for the match, therefore you could have an eligibility exclusion. But now it is quite clear 'if you are eligible to defer...'

"These proposed regulations would CLARIFY that, for purposes of determining whether an HCE has a higher rate of matching contributions than any NHCE, any NHCE who is an eligible employee under the safe harbor CODA must be taken into account, even if the NHCE is not eligible for a matching contribution.

This means that a plan provision which limits matching contributions to employees who are employed on the last day of the plan year will not be able to satisfy the ACP safe harbor, since a NHCE who is not eligible to receive a matching contribution on account of the last day requirement will nonetheless be taken into consideration in determining whether a plan satisfies section 401(m)(11)(B)(iii)"

as RCline pointed out, it becomes a moot point since for testing you are allowed to exclude the 4% match from testing

[MWeddell]

Thanks, Tom, for the reply and for helping me work through this issue. In my sample plan design, no HCE receives a more favorable match formula than any NHCE. In part, this is because the last day of the plan year condition doesn't apply to the safe harbor matching contribution allocated to NHCEs.

I think we've reached a consensus.

[Tom Poje]

well if you think you get confused, if it wasn't for the preamble I don't think I ever would have noticed the regs to say 'no eligibility conditions on the match' because it is not quite worded that way. And I got lucky that I didn't throw out my copy of the proposed regs becasue, as I indicated, the particular comment about no conditions was left off the final regs preamble. (I think this was an inadvertant error - or maybe the IRS didn't like the fact they used the word 'clarify'. who knows.

[KJohnson]

Just to add some clarification.

Basic safe harbor match for NHCEs only.

Discretionary match for HCE's only with a last day requirement.

As I understand it the consensus is that this works for the ACP safe harbor as long as you limit the amount of disretionary match to HCEs so that at any level of deferrals the HCE is not receiving any more than the NHCE is receiving for the basic safe harbor match. (This would also automatically meet the 6%/4% limits as well).

Does that limitation on no discretionary match exceeing the basic safe harbor match need to be "hardwired" into the document or do you just need to meet it in operation with your match?