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HCE-only Discretionary Match with NHCE-only Safe Harbor


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I'm looking at a plan that provides for a safe harbor match of 100% of deferrals up to 4% of compensation, available only to NHCEs.  The plan also has a discretionary match, which excludes NHCEs.

Consistent with the otherwise applicable requirements for safe harbor status, the plan states that matching contributions will only apply with respect to deferrals that do not exceed 6% of plan compensation and to the extent that any matching contribution formula is discretionary, the total amount of discretionary matching contributions will not exceed 4% of plan compensation.

However, I am concerned about the exclusion of NHCEs from the discretionary match.  It seems that this plan design might negate any reliance on the safe harbor.  Any thoughts?  Does the exclusion of HCEs from the safe harbor contribution make any difference insofar as upholding the plan's safe harbor status? 

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  • david rigby changed the title to HCE-only Discretionary Match with NHCE-only Safe Harbor

It appears that the “safe harbor” contribution, 100% of deferrals up to 4% of compensation, available only to NHCEs, is intended in the first instance to satisfy ADP.  Also, this contribution formula is consistent with the limitations applicable to the ACP safe harbor, since the match does not apply to deferrals in excess of 6% of compensation or provide for a greater level of match at higher levels of deferrals.

The discretionary match appears under a provision in the adoption agreement describing additional matching contributions that purportedly satisfy the ACP safe harbor.  To that end, this additional discretionary match is limited in application to deferrals not in excess of 6% of compensation and it cannot total more than 4% of compensation.  Also, no allocation condition, such as a last day or minimum hours of service requirement, applies to the discretionary match, which it seems should wrap up the ACP safe harbor neatly with a bow.

So far, so good, and we are protected by both ADP and ACP safe harbors, or so it seems.

That is, until we get to the part of the adoption agreement for describing “special rules,” where appears the following seemingly innocuous typewritten entry: “Discretionary Match excludes Nonhighly Compensated Employees.  Those employees are matched using the Enhanced Safe Harbor Matching Contributions.”

Whether limiting the allocation of discretionary matches to HCEs is or isn’t formally described as an allocation condition, inasmuch as it isn’t service-based, it seems nonetheless problematic for our safe harbors.

Please correct me if I’m wrong, but I believe from Luke’s comment that he is inclined to hold that this plan design runs afoul of the ACP safe harbor and so must undergo ACP testing.  Must it also undergo testing for ADP?

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I don't see a problem here. As long as no HCE is getting a higher rate of match than an NHCE, taking into account both the discretionary and fixed contributions, it should be fine. It sounds like the intention of this design is to allow them to satisfy the ADP safe harbor and then have the option to make or not make a match for the HCEs each year. Am I missing something?

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7 hours ago, Plan Doc said:

Please correct me if I’m wrong, but I believe from Luke’s comment that he is inclined to hold that this plan design runs afoul of the ACP safe harbor and so must undergo ACP testing.  Must it also undergo testing for ADP?

Yes, Plan Doc, that is what I was implying. I don't think that it satisfies the ACP safe harbor, but as C. B. Zeller points out, it should satisfy the ACP test. It still seems weird, I'll grant you that, so further review might be advisable.

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I think you are fine for ADP, I like others I don't believe this satisfies ACP since NHCE can not receive the discretionary match and thus HCEs receive a higher rate of match - even though the intent seems to be to give HCEs the same match as NHCEs "in good years". I think this is also a contribution that is likely to blow the deemed not Top Heavy excemption.

Though this seems to be one of those times that the Plan is in compliance with the spirit of the regulation, just not the letter of the regulation.

But for the record, I'd like to be wrong on this because it's hard to see how what they are doing is descriminaroty in practice.

 

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