MWeddell

Yes, this plan design is highly likely, but not certain, to comply with the BRF regulations. There is a question whether the effective availability requirement of Treas. Reg. Section 1.401(a)(4)-4(c) is met. However, given that the plan will have to satisfy the ACP test on the amount of match that is actually received, it would be awfully difficult for the IRS to argue that the group of employees to whom the match was effectively available substantially favored HCEs when the group that actually used the match fell within the ACP test limits after any ACP test correction, if needed, was made. Furthermore, all of the examples of BRFs that fail the effective availability requirement were a good deal more egregious than what your client desires to do. Still, I would caution the client that the plan design is unusual and so it possesses some risk.

For large employers, the passing margin on the ACP test is typically much wider than it is for the ACP and just a small percentage of HCEs will request in-plan Roth conversions. The plan design is quite viable for them.

You are proposing to amend the portion of the plan pertaining to profit-sharing contributions, i.e. the employer nonmatching nonelective contributions. Recalling that the 401(k) regulations use the word "plan" so that the 401(k), 401(m) and employer nonmatching nonelective contributions are three plans, you aren't even amending the safe harbor "plan" as that word is technically defined. I don't think the restrictions on mid-year amendments even apply to your situation.

It may violate the effective availability portion of BRF testing in a non-safe harbor 401(k) plan, but I don't think that's a definite conclusion, just a risk.

Also if the document doesn't explicitly say that the match is a QMAC, then the ADP testing provision in the plan document is unlikely to say that the match for NHCEs may be shifted from the ACP to the ADP test subject to restrictions in IRS regulations. Using the match in the ADP test might comply with the IRS regulations (although Kevin C also has a good point) but might not comply with the plan document.

Welcome, lisan1025. I don't see anyway around it. Clearly it's too late to amend the plan document for what happens in the plan year ended 9/30/2019. One has to follow the written plan document.

30 days is a safe harbor period (i.e. you know for certain you complied) for distributing the notice. If you distribute within less than 30 days, it may or may not be safe harbor; your client will have to be comfortable with uncertainty if the IRS were ever inclined to challenge it.

Math looks fine to me.

If the plan document claims that the plan satisfies the 401(m) safe harbor rules and the match is not available to all NHCEs eligible to make elective deferrals, then you have a disqualification problem. You can't choose to perform the ACP test on the fly. If the plan document doesn't claim that the 401(m) safe harbor rules are satisfied, then you have to perform the ACP test. Since you said the test will pass (also that coverage testing for the 401(m) portion isn't a problem), then you're home free.

Yes, the government's position is that it is a contribution (testing problems? permitted by the plan document? in SPD?) unless there is a reasonable claim that there has been a breach of fiduciary duty (and who wants to admit that?)

When you wrote that the plan is SH, do you mean that it satisfies the 401(k) safe harbor rules or that it satisfies both the 401(k) and the 401(m) safe harbor rules? It makes a difference here. The rule that no HCE can't have a better match rate available to him/her than a comparable NHCE will only apply to a 401(m) safe harbor plan. See Treas. Reg. Section 1.401(m)-3d)(4) and note that 1.401(k)-3(c)(4) doesn't apply when the safe harbor contribution is the 3% nonelective contribution, not the matching contributions.

On the new idea, yes, the aggregated Plan 1+2 has two different match rates. Only Plan 1's match rate must pass BRF testing (the participants who have a match at least as favorable as 100% to 0.75% of pay available to them is the same as the coverage test). I don't know whether you can use the nondiscriminatory classification test because you haven't told us whether the criteria used to determine who gets the better match rate (i.e. who is eligible for Plan 1) are reasonable and based on objective business criteria. See Treas. Reg. Sections 1.401(a)(4)-4(b)(1) and 1.410(b)-4(b).

It varies. How close would the plan design be to safe harbor? How close are they to having someone cross the HCE compensation threshold in the future? How inconvenient will it be to have restrictions on mid-year amendments? I think it's a subjective call, so it'll vary based on who the attorney / consultant / advisor is that is counseling the plan sponsor.

I don't find the original poster's questions to be difficult, which makes me wonder whether I'm overlooking something! Case one: If the $4800 is paid in cash only if the employee makes elective deferrals to the 401(k) plan, then it violates the contingent benefit rule. Cash remuneration expressly is included as an example of an "other benefit" to which the contingent benefit rule applies. I don't see anyone in this thread arguing against that conclusion. See also IRS Q&A 2007-29 from the annual American Bar Association meeting. Case two: If the $4800 contribution is paid to the nonqualified plan only if the employee makes deferrals to the 401(k) plan, then it still violates the contingent benefit rule. The nonqualified plan is not a Section 415(c) excess benefit plan, so Treas. Reg. Section 1.401(k)-1(e)(6)(iii) is inapplicable and 1.401(k)-1(e)(6)(iv) is applicable. If the nonqualified plan is subject to 409A, then it also is a problem with the deferral election timing rules, although admittedly it's quite difficult to read Treas. Reg. Section 1.409A-2(a)(9), especially the reference to (iii). In both cases, the problem goes away if the contribution is made in cash or in the qualified plan without regard to whether the employee defers into the 401(k) plan. If the employer wants to pay a cash bonus or make an employer nonelective contribution to the nonqualified plan of 4% times (actual compensation minus 401(a)(17) compensation limit), then that's fine. Given the typically high 401(k) participation rates for employees earning over the 401(a)(17) pay cap, the additional cost for that work-around may be slight. That's my understanding, although I would like to be wrong.

I agree with the other posters. We all are assuming that the plan document contains an age 59-1/2 in-service withdrawal option. The participants has to exhaust that withdrawal option before a hardship in-service distribution may be made.

There is a limited exception to the conclusion reached so far. Those who have not attained age 21 with one year of service can be allowed (and likely must be allowed due to the universal availability rule) to make 403(b) deferrals but can be permissively disaggregated for 401(m) purposes and not allocated the safe harbor match.

I disagree with the crowd. What the original poster has suggested is permitted if the rates of available match satisfy BRF testing, the 401(m) portion satisfies 410(b) (and it'll make the ACP test a bit of a challenge). Code Section 410(a) and the parallel provision in ERISA apply to "plan" meaning the whole plan, not the 410(b) use of "plan" which refers to just the 401(m) portion of the plan. To be eligible for the "plan," the original post says there is immediate eligibility, so no 410(a) violation. Of course, this still seems like a very dicey plan design, even if we can't pinpoint what rule it violates. It certainly will require a custom-designed document and seems like it is inviting IRS scrutiny. Definitely only proceed with the client's legal counsel looking at it more closely. It's been a very long time since I've seen this design actually implemented.

Private letter rulings become publicly available 90 days after they are issued, I believe.

The argument that others have made (and I agree) is that when employer contributions are paid is an "other right or feature" defined in Treas. Reg. Section 1.401(a)(4)-4(e)(3)(I) where none of the exceptions in (ii) apply. If it is available to a group that skews toward HCEs, it will fail the current availability test for a benefit, right or feature in Treas. Reg. Section 1.401(a)(4)-4(b). Those are the provisions that the original poster will need to cite to his/her clients.

I like your result obviously. The fact that this plan design is common enough that the IRS must have seen it helps. Thanks for the discussion.

I’ll adhere to the position stated in my April 16 post, Luke. Suppose NHCE has $90,000 of base pay and $10,000 bonus during a plan year. HCE has $150,000 of base pay and $0 bonus. There are other highly compensated employees of course who receive substantial bonuses, but I’m intentionally picking a worst case HCE when looking at Treas. Reg. 1.401(k)-3(c)(4). They each defer 4% of base + bonus and the enhanced safe harbor match is 100% match on elective deferrals made from the first 4% of compensation, but for match (not elective deferral) purposes “compensation” is defined as base pay only. Furthermore, base pay satisfies 414(s) testing. The matching contribution is intended to be an enhanced 401(k) safe harbor match. We still have a problem. NHCE defers 4% x $100,000 = $4,000. NHCE’s match is 4% x 100% x $90,000 = $3,600. HCE defers 4% x $150,000 = $6,000. HCE’s match also is $6,000. If we consider “safe harbor compensation” in Treas. Reg. 1.401(k)-3(c)(4) to mean base pay, then both NHCE and HCE contributed 4% of base pay, so we can compare them. The ratio of HCE’s matching contributions to elective deferrals is $6,000 / $6,000, which is greater than NHCE’s ratio of matching contributions to elective deferrals of $3,600 / $4,000. We have a failure to meet the safe harbor requirements for a plan that states it is a 401(k) safe harbor plan, which is a qualification failure. I’ll admit this is complicated, but after reconsidering it, I think I’d still very much want a client to avoid this situation.

I agree that having two plans aligned in this manner is a common law firm plan design. However, it does raise an issue whether being an attorney who is a partner instead of an associate attorney is a hidden service requirement that doesn't comply with Code Section 410(a). A law firm might frequently have an established practice that an associate becomes eligible to become a partner only after x years of service.

I badly botched the regulation citation, so let me correct that and quote it. Treas. Reg. Section 1.403(b)-5(b)(4)(iii)(B) states: (B) For purposes of paragraph (b)(4)(ii)(E) of this section, an employee normally works fewer than 20 hours per week if and only if— (1) For the 12-month period beginning on the date the employee's employment commenced, the employer reasonably expects the employee to work fewer than 1,000 hours of service (as defined in section 410(a)(3)(C)) in such period; and (2) For each plan year ending after the close of the 12-month period beginning on the date the employee's employment commenced (or, if the plan so provides, each subsequent 12-month period), the employee worked fewer than 1,000 hours of service in the preceding 12-month period. (See, however, section 202(a)(1) of the Employee Retirement Income Security Act of 1974 (ERISA) (88 Stat. 829) Public Law 93-406, and regulations under section 410(a) of the Internal Revenue Code applicable with respect to plans that are subject to Title I of ERISA.)

Let me try to confirm some follow-up thoughts on this topic. Suppose the client (not a church plan) wants to exclude employees who normally work fewer than 20 hours per week from 403(b) plan eligibility. This is permitted as an exception to the universal availability rule for 403(b) elective deferrals under Treas. Reg. Sections 1.410(b)-5(ii)(E) and 1.410(b)-5(iii)(B). Assume the plan year is the calendar year. Suppose that A is hired on February 15 of year 1. Suppose that, contrary to reasonable expectations, A earns 1,000 hours of service during February 15 of year 1 through February 14 of year 2. When does A become eligible to make 403(b) elective deferrals? I think it's January 1 of year 3 based on Treas. Reg. Sections 1.410(b)-5(iiI)(B)(2), although the last sentence of that provision (the one in parentheses) is difficult to interpret. Furthermore, as pointed out earlier in this thread, if an exclusion to the universal availability rule is used, it must apply to all employees covered by the exclusion, so one couldn't choose to simplify the plan by letting A become eligible on July 1 of year 2 of August 15 of year 2. Is that correct? Next, suppose the client has a matching contribution. For the match, A would have to become eligible as of a date earlier than January 1 of year 3 because now clearly the Section 410(a) rules apply. The employee would have to become eligible for the match no later than August 15 of year 2 (and many of us would design the plan so that A becomes eligible on July 1 of year 2). Of course, if there are no 403(b) deferrals until January 1 of year 3 at the earliest, than there won't be any match until then. However, A would be included in the ACP test for year 2: A would have compensation during the time period he/she was eligible for the match presumably. Is that also correct?

If the BRF test is performed based on available match as a percentage of plan compensation, then it probably passes more readily than in Tom Poje's example. It still seems like a lot of hassle unless the size of the employer and the number of anticipated part-time employees are both sizable.