Compensation Definition for Safe Harbor Plans

[Guest kowen]

Is there a statute or regulation that defines compensation for safe harbor matching contributions, or can it be defined by the plan document? I ask because I am weighing the merits of annual matching and per payroll mathching. Consider the following:

The employer sponsors a plan with a safe harbor match of 100% of the first 3% of compensation and 50% of the next 2%. An eligible employee, earning $52,000 per year ($2,000 bi-weekly payroll cycle), elects not to participate until the last payroll cycle of the year. The employee then elects a 10% ($200) deferral for the last cycle.

Would the employer match be $80, based on compensation for that payroll cycle, or $200 because the $200 deferral is less than 3% of annual compensation?

[Guest BYenk]

I believe that when the safe harbor is done as a match, you only have to contribute based on what the employee deferred, at 3%, or 1% in 2 out of 5 years. The definiition of wages cannot be defined in a Safe Harbor plan.

[R. Butler]

I think BYenk is referring to a SIMPLE plan. Compensation is defined in the document for a safe harbor plan. Generally the same compensation definitions are available for Safe Harbor plans as with all traditional qualified plans. See Notice 98-52, Section IV. B. for guidance.

[MWeddell]

For a qualified plan that is designed to satisfy the 401(k) or 401(m) safe harbors, the employer contributions must be allocated using a 414(s) definition of compensation. There are regulations under 414(s) that define more precisely what must be done.

There is an example in Notice 98-52 that says that the compensation must meet the reasonable requirement of 1.414(s)-1(d)(2), but the rest of the Notice contradicts this and fairly clearly requires that all of 414(s) be satisfied by the definition of compensation used for employer contributions.

[Guest kowen]

Thanks for the input. I think I may have asked the wrong question. Here's what I'm getting at: Assume the plan document states that the match will be calculated on per payroll basis, using only compensation for which deferrals are made, and that the plan specifically states that no "true-up" match will be made. Would a match of $80 in my previous example still be considered a safe harbor match for ADP/ACP testing?

[Belgarath]

You can use either. IRS Notice 98-52 originally required that plan year was required. Then they modified this in IRS Notice 2000-3 to allow the "payroll" method. Check Q & A-2 of 2000-3 for the details.