triple safe harbor match

[eilano]

Has anyone heard of a triple safe harbor match where you have an enhanced safe harbor match, a discretionary match and a fixed match?

[Tom Poje]

so in other words, if you defer 5%, you get the enhanced match of at least 4%, a fixed match (lets guess 3%) and the possibility of a discretionary match.

gee whiz at least 7% plus in match for 5% deferral. why oh why would you even need it to be safe harbor to avoid testing? I can't imagine a plan like that coming close to failing the ADP/ACP test. I suppose you could have HCE owners with small comp, but then how would they afford a rich formula like that?

[Guest HiKidsImASrPensionAdmin]

We have a plan similar to that, but it is a regular SH Match. The fixed match is 40% up to 6% of comp and the disc match has to be limited to 4% of comp. It is set up this way because most of the NHCE's do not defer...gives all the HCE's (there are at least 6 of them) the ability to max out while keeping any PS cont low (it is an integrated allocation formula).

[Tom Poje]

man, if I was an NHCE there I would find a way to defer. That is too good a deal.

[austin3515]

I've heard of plans that match 200% with crappy participation. Depends on the employees. "Free money" doesn't help if you can't put food on the table or pay the mortgage...

[maverick]

Heard someone saying under his breath at an employee meeting (as he was shaking his head):

"We're getting screwed."

The company was implementing a 401(k) with a very generous match that was 100% vested.

As others have said, even if it's described as "free money" there are people who won't defer. (Yes, there are situations in which a person is not financially able to defer).

[eilano]

So, this can be done. Will there be any testing issues?

[Nate X]

Here's your triple play:

1. Matching Safe harbor. (i.e 100% match on the first 4%)

2. Additional nondiscretionary match: Must be limited to the first 6% of comp.

3. Additional discretionary match: Must be limited to the first 6% of comp. & the match

itself can not exceed 4% of comp. (i.e. 66.66% match on the first 6%)

Follow these rules and you have no testing issues regarding the formula.

[eilano]

Are top heavy minimum contributions satisfied also?

[John Feldt ERPA CPC QPA]

In Nate's scenario, the Safe Harbor Match means that the Top Heavy minimum is deemed to be handled - that's one of the benefits of using safe harbor provisions. If some non-key employees do not defer, and thus they get no employer contribution, it does not matter because the plan is deemed to satisfy top heavy under the safe harbor plan regulations (assuming all NHCEs deferring get a Safe Harbor Match).

I first saw the Triple-Stacked Match design at a SunGard Corbel conference (Steve Forbes happened to speak at the one I attended).

This type of arrangement allows the maximum deferral for the HCEs and gives them the ability to control their own costs (by choosing to defer or not) and it gets them to the maximum $44,000 limit with the match if designed properly (and if the HCE pay is high enough).

If the NHCEs are doing jobs that are low paid (usually due to the skills required), then it is possible to see some lower costs due to lack of employee deferral (but it won't always end up that way because of households having more than one income producing source).

If the cross-tested safe harbor does not work due to demographics and the integrated plan does not fit their goals either, then this might be an option to show. Mr. Forbes suggested that you show both the average deferral scenario and the worst-case scenario (where each employee defers enough to get the maximum match).

In our firm we have discussed this design with less than 1 percent of our prospects. For example, one prospect was a feed mill with a lot of older workers (15 or so out of 60 people) with low wages - the cross-testing would not work and the integration was too expensive. However, an additional problem was that the HCEs were not earning the $220,000 limit - that made it impossible to get to the $44,000 limit in this design. They ended up offering no retirement plan to the employees (their industry does not compete for employees anyway, so any plan would have to justify itself on a tax-savings vs. employee cost basis).

I hope this helps!

-John

[richard]

In Nate's scenario, the Safe Harbor Match means that the Top Heavy minimum is deemed to be handled - that's one of the benefits of using safe harbor provisions. If some non-key employees do not defer, and thus they get no employer contribution, it does not matter because the plan is deemed to satisfy top heavy under the safe harbor plan regulations (assuming all NHCEs deferring get a Safe Harbor Match).

I first saw the Triple-Stacked Match design at a SunGard Corbel conference (Steve Forbes happened to speak at the one I attended).

This type of arrangement allows the maximum deferral for the HCEs and gives them the ability to control their own costs (by choosing to defer or not) and it gets them to the maximum $44,000 limit with the match if designed properly (and if the HCE pay is high enough).

If the NHCEs are doing jobs that are low paid (usually due to the skills required), then it is possible to see some lower costs due to lack of employee deferral (but it won't always end up that way because of households having more than one income producing source).

If the cross-tested safe harbor does not work due to demographics and the integrated plan does not fit their goals either, then this might be an option to show. Mr. Forbes suggested that you show both the average deferral scenario and the worst-case scenario (where each employee defers enough to get the maximum match).

In our firm we have discussed this design with less than 1 percent of our prospects. For example, one prospect was a feed mill with a lot of older workers (15 or so out of 60 people) with low wages - the cross-testing would not work and the integration was too expensive. However, an additional problem was that the HCEs were not earning the $220,000 limit - that made it impossible to get to the $44,000 limit in this design. They ended up offering no retirement plan to the employees (their industry does not compete for employees anyway, so any plan would have to justify itself on a tax-savings vs. employee cost basis).

I hope this helps!

-John

How about the following variation on a theme (new client which I just picked up).

This is the third year of their safe harbor 401k. 5 owners, 15 employees.

They have a safe harbor match (100% of the first 3% of pay plus 50% of the next 2% of pay)

And they have an additional fixed match of 200% of the first 6% of pay!

Does this plan design meet the safe harbor ADP and ACP rules? Also, are top-heavy minimums automatically satisfied?

Other issues that I can handle --- all 5 owners are contributing the maximum and none of the 15 employees have ever contributed, despite having been provided with safe harbor notices. (Yeah, I know the questions this might raise.)

And in year 1, they started this as a brand new plan 30 days before the end of the year, not 90+ days (this is not a new company, so I know year 1 was blown badly The client will enjoy hearing this).

Richard

[Dan]

I would highly recommend that employer have enrollment forms on file where each participant declines to defer.

[John Feldt ERPA CPC QPA]

Richard, you said "And they have an additional fixed match of 200% of the first 6% of pay!"

Make sure it is fixed and not a discretionary match. Otherwise, the matching limits section of your plan probably has something like "The Employer must elect to limit the match to no more than 4% of a Participant's Compensation under the discretionary match formula if the plan has a safe harbor 401(k) contribution formula and the Employer wishes to avoid the ACP test."

So if it was discretionary, then your plan would still have to pass ACP.

For Top Heavy however, ever since yesterday I'm no longer sure. It was disturbing to hear the IRS Q&A yesterday at the ASPPA conference when a similar Top Heavy question surrounding this was discussed. The IRS position as stated by Lisa Mojiri-Azad (and not disagreed with by Jim Holland) was: if the Employer makes any contribution other than the Safe Harbor contribution (even it is within the 6% deferral match limit and, if discretionary, within the 4% match limit), then the plan is NOT exempt from Top Heavy. You should have heard Craig Hoffman as he strongly disagreed. Lisa did not change her stance.

It sounded like the IRS was threatening to disqualify plans in one of the regions that were not providing Top Heavy minimums (the IRS's view was they weren't giving Top Heavy). This stance does not appear to be applied by the IRS in a nationally uniform manner. Craig was not a happy camper about this issue.

[Pension Nerd]

Let me just make sure I'm getting this right.....

You can have a fixed match in addition to the safe harbor match and the discretionary match (capped at 4%), which exceeds the 4% limit and not have to test the fixed match on the ACP test?

[John Feldt ERPA CPC QPA]

The fixed match does not have a 4% limit, but the fixed match can only be done on deferrals that do not exceed 6% of compensation. That would not require ACP testing. See #3i and 3ii below, from the regulation itself.

§1.401(m)-3(d) Limitation on contributions

(1) General rule. A plan that provides for matching contributions meets the requirements of this section only if it satisfies the limitations on contributions set forth in this paragraph (d).

(2) Matching rate must not increase. A plan that provides for matching contributions meets the requirements of this paragraph (d) only if the ratio of matching contributions on behalf of an employee under the plan for a plan year to the employee’s elective deferrals and employee contributions, does not increase as the amount of an employee’s elective deferrals and employee contributions increases.

(3) Limit on matching contributions. A plan that provides for matching contributions satisfies the requirements of this section only if

(i) Matching contributions are not made with respect to elective deferrals or employee contributions that exceed 6% of the employee’s safe harbor compensation (within the meaning of §1.401(k)-3(b)(2)); and

(ii) Matching contributions that are discretionary do not exceed 4% of the employee’s safe harbor compensation.

[ak2ary]

Lisa Mojiri Azad said alot of stuff that was absolutely ridiculous. She also caveated all of them by saying "My reading" or "my interpretation" ...while Jim Holland did not publicly disagree with her, he also did not support her positions. Since Jim has publicly taken the opposite position many times on most of these issues and Marty P has taken even less restrictive stances than Jimmy; it seemed that they didn't want to disagreee with each other in public. Nonetheless, I think most practicioners would agree that the triple-stacked match as described above is exempt fom top heavy if the only plan of the employer