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12/98 Q1.V 401(k) Safe Harbor


Guest JB2
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Guest JB2

Looking for help with the following exam question ****** ER creates a new product line and hires 20 production EE in early 98. All 20 will become eligible to participate in 99. EEs are paid min wage and ER anticipates that few, if any, will choose to defer into the 401(k) plan. ER is concerned that HCEs will not be able to defer the 402(g) limit because ADP test will fail resulting in refunds to HCEs.

Discuss design features of safe harbor 401(k) and how it could meet the needs of HCEs for PYE 12/31/99.

ER is concerned that safe harbor ER contribution is 100% vested and wants to maintain the curent 2/20 vesting schedule for all ER $. Discuss 3 alternative features available in a 401(k) plan which could help to accomplish ERs objectives w/o using safe harbor.*********

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A safe harbor 401(k) would allow the HCE employee to defer up to the maximum without having to worry about the ADP testing and possible refund of excess deferrals. As long as the matching formula would equal 100% of the deferrals up to 3% of compensation and a 50% match for deferrals from 3% to 5% the plan is deemed to satisfy the ACP test as well. If the match is not wanted the ER could use a 3% nonelective contribution for all eligible EEs (which is 100% vested at time of contribution).

If the ER does not want a safe harbor plan then the following options are available to bring the plan into compliance.

1. Use of the prior year ADP/ACP testing information when determining whether the plan passes the testing for the current year.

2. Exclusion of the new product line employees from eligibility in the plan. However, the plan must still pass the coverage testing.

3. Use of a QNEC or QMAC to satisfy the failed testing of ADP/ACP.

4. Use of the Multiple Use Test to determine whether the plan passing the required testing without requiring a QNEC/QMAC.

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