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Safe Harbor 403(b) Plan, but.....


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So our firm took over the audit of a 403(b) Plan, YE 12/31/20 (yes, 2020, don't ask). The plan document we have shows that it is written as a "Safe-Harbor" 403(b) Plan, with a match equal to 100% of deferrals on the first 3% of compensation and then 50% of deferrals on the next 2%. However, in going into the participant testing, the first person picked for testing had $19,500 of deferrals, ok. When the match was tested, the matching contribution was equal to 5% of compensation, not 4%. Anomaly? No, anybody with greater than 5% of deferrals received a 5% match.

We noted that the document does allow for a matching contribution, and it's defined as discretionary. Question brought up is whether the extra 1% can be considered a discretionary match, and, what, if any, ACP testing would have to be performed? To complicate matters, there is no TPA retained by this employer, so it is a big old mess.

Thanks for any replies.

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Yes, you would need to test ACP; you can test either the 1% excess itself or test the combined match.

The safe habor match is excluded from testing up to 6%; if they are intent on doing the 5% match then it can be amended mid-year to increase the basic safe harbor formula to a 5% enhanced safe harbor match.

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Glad they are your client and not mine!  

@Nate Smentions amending the plan to be a 5% safe harbor match, but I believe you had to make that amendment by the last day of the following play year, which would have been December 31, 2021.

I think you will run into issues even if you say the extra 1% is a discretionary match.  Basically any participant who deferred less than 5% likely did not receive the 1%.  Or at least not the full 1% if they deferred between 3% and 5%.  Have to also consider if the discretionary match is based on a pay period or plan year.  If plan year, you may have catchup contributions to consider as well.  Not to mention the headache if a participant has left in the meantime and already rolled their funds out of the plan.  May be worth talking to ERISA counsel on this one.

 

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I don't see why you would need to test ACP.

The discretionary match is 1) not matching on deferrals greater than 6%, nor is the match 2) greater than 4% of pay.

QKA, QPA, CPC, ERPA

Two wrongs don't make a right, but three rights make a left.

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You would just need to make sure to separate that match out from the SHM at the custodian.

QKA, QPA, CPC, ERPA

Two wrongs don't make a right, but three rights make a left.

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I agree with BG. This seems like it would meet the criteria for a discretionary ACP safe harbor match.

Free advice is worth what you paid for it. Do not rely on the information provided in this post for any purpose, including (but not limited to): tax planning, compliance with ERISA or the IRC, investing or other forms of fortune-telling, bird identification, relationship advice, or spiritual guidance.

Corey B. Zeller, MSEA, CPC, QPA, QKA
Preferred Pension Planning Corp.
corey@pppc.co

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19 hours ago, BG5150 said:

I don't see why you would need to test ACP.

The discretionary match is 1) not matching on deferrals greater than 6%, nor is the match 2) greater than 4% of pay.

 

19 hours ago, C. B. Zeller said:

I agree with BG. This seems like it would meet the criteria for a discretionary ACP safe harbor match.

As described, it's an excess match; the plan designed SHM is providing the first 4%, the discretionary an additional 1% but only on deferrals in excess of 3% of comp.

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3 hours ago, Nate S said:

As described, it's an excess match; the plan designed SHM is providing the first 4%, the discretionary an additional 1% but only on deferrals in excess of 3% of comp.

So? The rule under 1.401(m)-3(d)(2) doesn't say discretionary matching contributions. The overall rate of matching contributions does not increase as the amount of deferrals increases in this scenario.

Free advice is worth what you paid for it. Do not rely on the information provided in this post for any purpose, including (but not limited to): tax planning, compliance with ERISA or the IRC, investing or other forms of fortune-telling, bird identification, relationship advice, or spiritual guidance.

Corey B. Zeller, MSEA, CPC, QPA, QKA
Preferred Pension Planning Corp.
corey@pppc.co

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Want me to complicate this even further? The 5% match was not capped at the $285,000 compensation limit. So one person made $495,000 and deferred $25,500. Match allocated: $24,750. And to go back to BeachBums comment, there was a true up contribution for 2020, made in January 2021, to get this person to the $24,750.

How I wish the partner had passed on this audit......

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1 hour ago, bzorc said:

Want me to complicate this even further? The 5% match was not capped at the $285,000 compensation limit. So one person made $495,000 and deferred $25,500. Match allocated: $24,750. And to go back to BeachBums comment, there was a true up contribution for 2020, made in January 2021, to get this person to the $24,750.

How I wish the partner had passed on this audit......

That's a simple fix under EPCRS.

Just move the excess amount (adjusted for earnings) to the suspense account.  The employer can (must) then use those funds to offset the next employer contribution until the amount is exhausted.

QKA, QPA, CPC, ERPA

Two wrongs don't make a right, but three rights make a left.

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1 hour ago, bzorc said:

How I wish the partner had passed on this audit......

And just think of the billable hours to fix it all...

QKA, QPA, CPC, ERPA

Two wrongs don't make a right, but three rights make a left.

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4 hours ago, C. B. Zeller said:

So? The rule under 1.401(m)-3(d)(2) doesn't say discretionary matching contributions. The overall rate of matching contributions does not increase as the amount of deferrals increases in this scenario.

I stand corrected, I was looking at them as two separate schemes, but should not have, thanks!

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