Can contribution also be used to satisfy 401(k) safe harbor rules?

[MWeddell]

Employer sponsors a profit sharing / 401(k) plan. Employer currently contributes 5% of pay to all eligible employees and an additional 5% of pay on compensation that exceeds the social security wage base.

Employer is considering contributing $40,000 for employees who also are 5% owners but otherwise not changing the allocation formula. General 401(a)(4) test on a benefits (age-weighted) basis is run without imputing permitted disparity and passes easily. Because all NHCEs receive at least a 5% allocation and no HCEs receive an allocation greater than 20% when measured on a contributions basis, the new cross-testing regulations don't pose a problem.

Employer is also considering fully vested the contribution (and meeting other requirements of qualified nonelective contributions) and using it to satisfy the 3% of pay employer nonmatching option for a 401(k) safe harbor so that no ADP testing is required. My question (finally!) is whether this is permitted for contributions that are allocated using the social security wage base as the integration level if the actual 401(a)(4) testing does not impute permitted disparity.

[rcline46]

Chances are if the client is going to contribute enough to get the HCEs (owners) to $40000, then the owners will not be able to fund the 401(k) for themselves, and therefore you will not need the Safe Harbor!

[AndyH]

MWeddell, I think the answer to your question is clearly yes. You can inpute permitted disparity into general testing (for appropriate plan types) regardless of whether or not the plan is integrated with social security.

The opposite is also true, that the testing methodologies have no impact on plan design. You can have an integrated plan and test with or without permitted disparity.

[MWeddell]

RCline46 - There are HCEs who are not owners who will benefit by converting to the 401(k) safe harbor. The fact that the two owners will get $40,000 of profit-sharing and hence plan to make $0 of elective deferrals will help the ADP test, but satisfying the safe harbor rules will completely eliminate the ADP test.

AndyH, Thanks for the answer. That's what I thought (I didn't want to bias the responses by declaring that), but legal counsel was questioning it a bit, so I thought I'd throw it out for discussion.

[rcline46]

I still would check that you need the safe harbor 3% fully vested. Its a waste if you will pass the ADP without it.

However, if you DO use the 3%, the testing CANNOT use permitted disparity on the 3% portion!

That means you develop ebars on the 3% and add ebars for the balance of the base (2%) contribution which means only a 2% PD increase (not 5%). THis will change your results rather dramatically. Hope your testing software is able to handle that or you will have a nasty spread sheet problem.

[MWeddell]

Thanks.

The testing passes by a fairly wide margin without imputing disparity at all. If I need to impute permitted disparity on all but the 3% QNEC, I can handle that.

[Tom Poje]

arrrggghhh. my pet peave! A 3% safe harbor is not a QNEC!

I call them SHENCs because of my dry sense of humor and to avoid confusion. Safe Harbor NonElectiveContribution! Heck, if they can it for QNEC I can abbreviate the same way for the safe harbor.

Note: a QNEC can not serve triple duty like the safe harbor 3%.

also, providing a QNEC does not guarantee passing the ADP test. in a standardized plan all employees, including HCEs receive the QNEC. A QNEC can be any amount, a SHNEC has to be a minimum of 3%

I know, it is a subtle difference, but I have to have something to grumble about in the orning.