ADP Safe Harbor Match / Non-ACP Discretionary Match - Allocation Conditions Allowed?

[EBECatty]

Would appreciate it if someone would confirm the rule here.

Plan has a basic SH match to satisfy the ADP safe harbor requirements. It also has a discretionary match, which is not intended to satisfy the ACP safe harbor test.

If the discretionary match imposes a 1,000 hour or last day requirement, does that blow the ADP safe harbor because it could cause an HCE who works all year to get a higher rate of match than a non-HCE who leaves during the year?

[BG5150]

No.  ADP test is still cool.

[Mr Bagwell]

The ADP safe harbor is not in jeopardy.  However, you will most likely have to ACP test the discretionary match.

Is the plan top-heavy?  This type of arrangement lends me to think the top-heavy exclusion is lost and the plan may have to cover some non-deferring employees with a top-heavy contribution.

I don't like this plan design for a safe harbor plan, but I say that alot. 

 

[BG5150]

Mr. Bags: You are right that the TH exclusion is gone.

Only plans that are solely funded with deferrals and a Safe Harbor contribution get the pass.  Keep in mind, that includes discretionary match that satisfies ACP SH.

[EBECatty]

Thank you all for the quick replies. Top-heavy is not a concern. The discretionary match historically has passed ACP testing very easily, it just doesn't meet the ACP safe harbor.

Is this analysis (on the ADP safe harbor) from FT William wrong or outdated or am I missing some distinction:

https://www.ftwilliam.com/articles/SafeHarbor.html

[Mr Bagwell]

"Because of the pitfalls described below, ftwilliam.com documents do not set out separate 'safe harbor' and non-safe harbor' matching contribution sections. Instead, we provide flexibility within the single matching contribution section to specify exceptions and special rules."

I would check to see the if the ftwilliam document still does this.  The above link is from 2012.

The FIS document does separate the safe harbor and non-safe harbor matching contribution sections.  You can select in the document to ACP test the additional match.

[Kevin C]

2 hours ago, EBECatty said:

Is this analysis (on the ADP safe harbor) from FT William wrong or outdated or am I missing some distinction:

https://www.ftwilliam.com/articles/SafeHarbor.html

I agree with FtWilliam's analysis.  The cited reg section has not changed since that was written. It refers to a limitation on "matching contributions" for HCE's.  Other sections of the reg refer to "safe harbor matching contributions" and "qualified matching contributions".  I don't think the reference here to "matching contributions" was accidental.

From the article:

Quote

 

Treas. Reg. 1.401(k)-3(c)(4) (the ADP Safe Harbor rule) provides as follows regarding a plan that satisfies the ADP safe harbor with safe harbor matching contributions:

(4) Limitation on HCE matching contributions.-

The safe harbor matching contribution requirement of this paragraph (c) is not satisfied if the ratio of matching contributions made on account of an HCE's elective contributions under the cash or deferred arrangement for a plan year to those elective contributions is greater than the ratio of matching contributions to elective contributions that would apply with respect to any eligible NHCE with elective contributions at the same percentage of safe harbor compensation.

It is of utmost importance to note that the "ratio of matching contributions" mentioned in the regulation above does not differentiate between safe harbor matching contributions and any other matching contribution type. Therefore, if a plan is designed to use a safe harbor match to satisfy ADP testing, and it also provides for a discretionary (and/or additional fixed) match, then in order to maintain the benefit of the safe harbor match, no HCE can receive a rate of match at any level of deferral that is greater than the rate of match received by any NHCE at the same level of deferral. Unfortunately, this rule can be easily broken simply by including some very common restrictions on the discretionary and/or fixed match portion of the plan. Plans that require participants to meet a last day requirement or hours of service requirement in order to receive the discretionary match put the plan's safe harbor status into jeopardy.

 

 

[Mr Bagwell]

For example, assume that a 401(k) plan includes a safe harbor match as well as an additional discretionary match. This plan requires participants to meet a last day requirement in order to receive the discretionary match. Charles is an NHCE who makes elective deferrals into the plan each year, including in 2012. Charles terminates employment in October 2012, and therefore is not eligible to receive a discretionary matching contribution for 2012. Janet, an HCE, also makes elective deferrals to the plan each year, including in 2012. Janet remains employed with the company for all of 2012 and receives both a safe harbor match and the discretionary match. Janet will receive a higher ratio of matching contributions since she receives the discretionary match and Charles does not. The plan is therefore in violation of the rules discussed above, preventing the plan from benefitting from the safe harbor rules and requiring it to satisfy ADP testing, even though the safe harbor match must still be made and be 100% vested. (Emphasis mine)

EOB 2021  11.574 and 11.575  same context, same situation...  "the ADP test is still waived," .....perform the ACP test for all matching contributions.

What nuance am I missing where the link says ADP testing needs to be satisfied and the EOB says the ADP is still waived?

 

later add:  EOB 2013 edition 11.568 1.e.1

[EBECatty]

The ERISApedia Qualified Plan book comes to a less-clear (to me, at least) conclusion:

After citing the same section of the regs: "This requirement means that a 1,000 hour or last day requirement may not be imposed on any matching contribution. Such a provision imposed on the non-safe harbor matching contribution would also result in the application of ACP Testing to the plan."

It's not clear whether "any" matching contribution in the first sentence means any safe harbor matching contribution or simply any matching contribution. It doesn't specify whether the plan would be required to do ADP testing, but the second sentence confirms ACP testing, which is fine. 

[MWeddell]

I agree with Kevin C.  Where the match is used to fulfill the safe harbor conditions, this rule is part of the 401(k) safe harbor rules.  Kevin provided the citation to the regulation.