Safe Harbor Design

[mming]

A company currently sponsors a non-safe harbor 401k plan where very few NHCEs defer, limiting the owner to very small deferrals and matching contributions for himself. Present match is 100% up to 3% of comp with a 2/20 vesting schedule. It would appear amending the plan to a safe harbor design where the match would be 100% vested and be increased for an additional 50% match on the deferrals between 3 and 5% of comp. would be worthwhile so that the owner could defer $11,000 next year and receive the full match.

Since the owner stands to significantly benefit while contributing a match to a very small portion of the employees, would the plan have to be cross-tested for 401(a)(4), or does the safe harbor design eliminate this concern?

The plan has about 20 employees and is currently not top-heavy, but if the owner will be making maximum deferrals and receiving full matches, he will have to provide all participants a min. TH benefit of 3% of comp. in an estimated eight years.

[Tom Poje]

you have the best of everything.

starting in 2002, a safe harbor 401k plan is also deemed to pass top heavy, providing no additional contributions are made.

one other possibility is to go with a 3% nonelective (satisfies ADP safe harbor) and a discretionary match (which if limited to 4% of comp) satisfies ACP safe harbor. if few people defer the owner comes out ahead.

[Guest Brenda Schachle]

I have a safe harbor question for you:

we have a new client with a 6/30 year end. For plan year ending 6/30/00 nad 6/30/01, they were safe harbor and provided the necessary notices and matching contributions. They did not provide the notice 30-90 days before the current plan year beginning 7/1/01 since their intent is to discontinue the safe harbor and drop back to a match contribution with a vesting schedule. They deposited a match (same as under safe harbor) for July. Is this a 100% vested safe harbor match or a vested match? What about the August Match? What notice do they need to provde their employees regarding the discontinuance of the safe harbor provisions? In what time frame should the discontinuance notice be given?

[Guest sampat]

Are there anu limitation on how liberal a safe harbor match could be? I run a three person company and me and my wife (HCE's want to defer the max) while the third employee NHCE does not want to defer any. Can ve set up some thing like 4-to-1 or liberal safe harbor match for upto 6% of compensation deferred and still pass the ACP and ADP safe Harbors

[Richard Anderson]

Yes, but it has to be in the notice. Your employee would not defer with a 400% match that is 100% vested?

[Guest sampat]

Richard,

The employee is somewhat distatntly related to me and I am doing him a favor by employing. I know he has a legal right to a match but he will probably not defer. Are there any audit considerations I need to be aware of?

Also,

1. When does the employer match funds need to be contributed (End-of-year or per payroll?)

2. Is there a way to terminate the plan if the HCE and NHCE tax situations change?

Thanks.

[Richard Anderson]

Hi Tom,

You said: "starting in 2002, a safe harbor 401k plan is also deemed to pass top heavy, providing no additional contributions are made".

Sal Tripodi said at the ASPA Summer Academy that the plan will be deemed to pass the Top Heavy requirements if the only other contribution in a safe harbor 401(k) plan is a discretionary match that passes ACP safe harbor (limited to 4% of comp, etc.)

If that is correct, then in 2002 a plan could have a safe harbor match of 200% on the first 5.5% deferred. An HCE owner making in excess of $200,000 defers $11,000, receives $22,000 safe harbor match, and then tosses in $7,000 as a discretionary match for a total of $40,000.

[Tom Poje]

King Richard:

the actual wording of Section 613 Modification of Top Heavy Rules

part (d) Definition of top heavy plans - paragraph (4) of section 416(g) is amended by adding at the end the following new subparagraph:

(H)cash or deferred arrangements using alternate methods of meeting nondiscrimination requirements - the term top heavy plan shall not include a plan which consists solely of:

(i) a cash or deferred arrangements which meets the requirements of section 401(k)(12) AND

(ii)matching contributions with respect to which the requirements of section 401(m)(11) are met.

401(k)(12) refers to the ADP safe harbor and 401(m)(11) refers to ACP safe harbor

I am guessing in your example the 'safe harbor match' is used to satisfy the ADP safe harbor. it would probably be better to use the term 'enhanced match' - aybe a little less confusing.

Of course, if you sponsored a plan like that, I would expect everyone to defer out the wazoo and you wouldn't save anything avoiding top heavy miniums anyway.

[Tom Poje]

Brenda:

Interesting question.

The notice itself should be the item that turns on the safe harbor for a given year. So you are probably okay.

However, that being said,

I personally don't think there is a 100% guaranteed answer to this question.

It might depend on how the most recent notification was worded.

For example, I am looking at one sample notice that says

For the year starting xx/xx/xxxx and ending yy/yy/yyyy the plan will...

No problem there.

on the other hand I am looking at another sample notification that says

Begining 1/1/2001 the Company plan has been designed to qualify for safe harbor requirements...

One might argue that notification implies the plan will be safe harbor until further notice. or one could further argue that to qualify for safe harbor in itself requires the timely notice each year.

The ERISA Outline Book states that a plan has to be ADP tested if notice was not timely provided - even if safe harbor contributions were made. But maybe that only applies to plans in which notice was given, but not timely.

on a side issue, where were the match contributions deposited? does the investment house keep separate track of 100% vested match and subject to vest match? maybe that can be the driving factor.