Safe harbor non-elective for HCEs

[thepensionmaven]

I am recalling an ASPPA workshop of a few years ago, where it was advised not to give any HCEs the safe harbor non-elective contribution.

I was not an attendee.  My client maintains a safe harbor 401K/PSP new comp allocations.  After 3 years, now he wants to know why he or any of the family members did not receive the "safe harbor" 3% contribution.

Besides that language in the plan document, as well as the fact that the general test stands a greater chance of being blown, what are some other good reasons???

[Mike Preston]

You need a better reason than the general test is better off?

[KMG77]

I assume that they are also providing a cross-tested allocation. Typically the safe harbor contribution is "made up" in that allocation. (e.g. an HCE would get a 9% allocation or whatever the general test would support). The advantage to excluding HCEs is in situations where you would find out the owner's son joined the company after the fact and it would negatively impact the cross-tested allocation.

[Tom Poje]

I would suspect at the SSPPA conference the issue is 'family members', not a "in general, don't provide HCEs with the 3%"'

if a 'child', is provided a 3% safe harbor, that often blows cross testing out of the water. and by child, even a 30 year old can cause problems

[CuseFan]

Exactly - maximum testing flexibility and surprise avoidance - those should be sufficient reasons, and the owner(s) don't get any less, it's just in a different bucket that isn't immediately vested (which the owner shouldn't have to worry about anyway).

[Mike Preston]

You guys are missing my point. When testing based on permitted disparity the 3% SH can not take advantage of the integration.  That same amount as a regular employer profit sharing contribution can do so.  All other things being equal, the HCE's can get more dollars as employer profit sharing than as SH.

[Tom Poje]

if I am only providing the 3% safe harbor to the NHCEs, then imputing disparity makes no sense.

but then the max for the HCEs is 9%, and whether that consists of 3% safe harbor and 6% profit sharing or 9% profit sharing it doesn't matter as disparity will not be imputed anyway.

If the intent is to get the HCEs more then imputing disparity comes into play, and even only a minimal 1% profit sharing to the NHCEs (generally not enough for the gateway) will max out the disparity on anyone age 42 (or thereabouts). any one older will still increase, just not by the max disparity of 0.65.

so unless there is match involved as well, I'm not sure excluding HCEs from the safe harbor accomplishes much, except, as I mentioned, if you are cross testing, and you have a young HCE, such a contribution will throw things out of whack (unless you can get by restructuring testing).

 

[Mike Preston]

What if 3% gateway only "buys" 8% w/o disparity but 8.25% w/ disparity?  I agree that if 3% buys exactly 9% (very unlikely) you have concocted an example where it is not better.  But it certainly isn't worse and can often be better.  Even if the consultant runs the test w/o disparity it is often advantageous on audit to use disparity to save a test that through data entry error would otherwise fail. Tell me the downside (other than getting the concept into the skulls of other advisors)?

[Tom Poje]

plan is safe harbor so I can pass ADP test.

so NHCEs are going to get the 3% no matter what.

and it is fully understandable you can't impute disparity on safe harbor.

I don't see the argument that imputing disparity works better if you don't give the HCEs a safe harbor . no matter what I give the NHCEs in a safe harbor plan, when figuring disparity it is based on 100% of contribution less the 3%.

Excluding the HCEs from safe harbor means it will always be 100% of the profit considered when imputing disparity.

thus when imputing disparity the total contribution for HCEs is always considered while a lesser amount is considered for the NHCEs

 

[QP_Guy]

What about the improved ability to receive in-service distributions?  SH source can't use 2 yr/5yr rules.

[Gilmore]

We recently had a client that used their "wait and see" option to amend the plan to include a 3% nonelective safe harbor.  HCEs are excluded from receiving the safe harbor, mainly as a cost control issue. 

QP's comment brings up an interesting point.  If the profit sharing portion of the plan does have more relaxed inservice distribution options, could the plan be considered discriminatory if HCEs are given 3% as a profit sharing contribution, and the NHCEs are stuck with the more stringent inservice distribution options of the safe harbor source?