Discretionary Matches and Safe Harbor 401(k) Plans

[katieinny]

A plan has a 3% fixed contribution under a Safe Harbor Plan, so no ADP test. The ER will also provide a discretionary match. I've been given conflicting information as to whether the discretionary match can be a Safe Harbor match to avoid the ACP test. Both are reliable sources. One says yes, the other says no. I need a tie-breaker.

[Archimage]

I say the ACP testing can be avoided as long as the discretionary match is not greater than 4% of compensation.

[KJohnson]

And you cannot match anythng past 6% of compensation deferred.

Thus, 50% of the first 6=o.k. becuase you meet the 6 and 4

However 50% of the first 7 not o.k. because although you meet the "4% rule" you do not meet the "6% rule"

[austin3515]

Per the 2001 401(k) answer book, question 2:152:

A plan that satisfies the ADP safe harbor (i.e., your 3% nonelective) also satisifes ACP as long as one of the following three scenarios applies (I only include the applicable one):

1) The Plan provides non-safe harbor matching contributions and a) the matching contributions are not made with respect to compensation in excess of 6% of compensation, b) the matching contribution does not increase as the rate of deferrals increases, c) at any rate of deferrals, the rate of matching contributions that would apply to any HCE who is an eligible emlpoyee is no greater than the rate of contributions that would apply to an NHCE who is an eligible employee and who has the same rate of deferrals.

[KJohnson]

I thought the only"cap" for a plan with a stated match was that you could not match anything above 6% deferred. Therefore if you stated the match in your doucment as 100% of the first 6% deferred you would be still be o.k. for safe harbor.

However, a discretionary match is subject to two caps. The 6% cap discussed above and also the cap that a match cannot exceed 4% of comp. Therefore the match above would not be o.k. if it were a discretionary match.

[Archimage]

KJohnson, you lost me. Which match would not be okay? The only match stated above is your example and it looks okay.

[austin3515]

Agreed!

The 4% hitch is buried a little further down on the page!

non-safe harbor Nondiscretionary match (i.e. wording included in plan doc) - limit is no compensation in excess of 6% of wages may be considered.

Non-safe harbor discretionary match - same 6% limit as above. However in addition, contributions that eqyate to >4% of earnings are not allowed regardless (i.e 25% of 20% = 5% of Comp, so no go).

Right?

[KJohnson]

If this were a discretionary match, 100% of the first 6% deferred would be a matching contribution of 6% of comp and it would flunk the 4% of comp rule for discretionary matches..

[Archimage]

I disagree. The discretionary match limit is a dollar limit to 4% of comp which is different than the 6% limit on what can be matched. As long as the total discretionary match does not exceed 4% of comp, you are okay.

[austin3515]

For what its worth, I agree with Kjohnson. It seems to jive with the 401(k) answer book...

[KJohnson]

Now I am confused --A discretionary mtach of 100% on the first 6% deferred would mean that for anyone wo defers over 4% of commpensation, you would be making a match in excess of 4% of that participant's compenstion.

As I think we both agree, you cannot make a discretionary match in excess of 4% of compensation if you do not want to have to run the ADP test in a safe harbor plan.

[Archimage]

The 6% limit deals with what you match, not a dollar limit. You can match 25% of the first 6% of compensation. This passes the 6% limit because your formula does not match on a percentage greater than 6% of comp. Since this would result in a participant receiving a total of 2% of comp match, it would be lower than the 4% limit.

In essence, you could have a stated match formula of 300% of the first 6% of compensation and still pass ACP safe harbor.

[katieinny]

Thanks for all the input. I'm convinced that the discretionary match does not have to be tested as long as it doesn't exceed the limits, (whether or not it's called a safe harbor match) which is what I was trying to confirm.

[austin3515]

It seems everyone is agreement on everything.

Arhcimage, that last is an interesting one - I've never seen a match of greater than 100%. Is it even allowed? I'm surprised its never heard of...

[Archimage]

I would not call it a safe harbor match either but it definitely satisfies the ADP/ACP safe harbor as long as you keep it in the limits.

[Archimage]

As long as the match formula is uniform and given to NHCEs as well, there is no reason that it would not be okay.

An employer might wish to max out to their $40,000 using a safe harbor match of this type. I have yet to see someone want to do it but it is certainly permissible.

[Fred Payne]

No one brought up the Fixed Match!

If the only one to defer happens to be an HCE, that HCE can receive a $40K contribution under a Safe Harbor 401(k) and the contributions qualify for the Safe Harbor and is exempt from the Top Heavy Rules! THe HCE gets to $40K with:

1. Employee Deferrals

2. A 3% Non-Elective or a Basic Match or an Enhanced Match

3. A discretionary Match

4. A Fixed match

Only the Discretionary Match can be subject to allocation requirements and a vesting schedule.

[Tom Poje]

ok, this is the way I think of it.

To satisfy ADP safe harbor, you have to provide

1. Basic Match

2. enhanced match

or

3. Safe harbor Nonelctive Contribution

(which I affectionately call SHNEC just cuz I can't stand typing the silly words over and over)

at this point, you have done nothing to satisfy ACP safe harbor.

note that the enhanced match could be anything, as long as as it is a better deal than the basic match in all possible scenarios. Therefore, it could be greater than 100%, it could be 100% up to 8%, etc.

now you have to satisfy ACP safeharbor.

if you provided the Basic Match, you have satisfied ACP safe harbor.

if you provided the enhanced match, you MIGHT have to run the ACP test, if the enhanced match was greater than 6% of deferrals. (or if there are after-tax contributions)

if you provided the SHNEC, then to satisfy ACP safe harbor you need some sort of match. the discretionary match is limited to 4% of compensation. so suppose you provide a 66.66% match up to 6% deferred. This satisfies the cap on deferrals (no more than 6%) and the maximum match is 66.66% * 6 = 4% of compensation which satisfies the limit on comp.

If I remember correctly if you exceed the limits, then you run the ACP test either on just the amounts exceeding the limit, or, you could test on all match.

If no discretionary match is provided, then there is no ACP test, no safe harbor needed, etc. Note: the SHNEC does not satisfy ACP safe harbor, the ACP simply doesn't exist.

Now, can you provided the Basic Match or Enhanced match and still provide the discretionary match? yes, but why would you, it just confuses my simple brain. and those limits will kill you.

[RTK]

I find this an amazing thread from the perspective of why does all of the legislation/guidance in the employee benefits area result in even the pros standing around and scratching their collective heads and asking "what does this mean." And where is the statutory underpinning for the 4% limitation on discretionary contributions? And why did the IRS make the GUST compliance dates so complicated that there is still discussion on proper certification and amendment adoption dates? And what were the rules in Rev. Rul. 98-1? And whose idea was the HIPAA EDI and privacy requirements? I think I will stop now.

[KJohnson]

Shortly after 98-52 I remember going to a benefits conference and someone asked the IRS where the 4% came from. To paraphrase, their response was "We made it up because we thought it was a good rule."

[TPApril]

many years later on this thread, and i have a question, which I don't even know if it makes sense:

safe harbor plan makes the adp safe harbor basic matching contribution.

can they in addition make an acp safe harbor match which is essential the same exact match as the adp safe harbor match, essentially resulting in combined match up to 8%, all based on up to 6% of compensation?

[Tom Poje]

I cautiously say yes.
you can't have allocation conditions on the additional match.
if it is discretionary, then it must be capped at 4% of comp.
e.g. you could have 66% of the first 6% deferred.
if discretionary or required match it is limited to 6% deferred.

the ERISA Outline book uses an example of a basic match and an additional match of 30% on the first 5% deferred

[TPApril]

thanks! the sponsor at hand simply wants to repeat the standard basic safe harbor match for its discretionary match, which meets those conditions.

[imchipbrown]

A plan is projected to need a Safe Harbor in 2015 so that the owners can defer their $18,000 in 2015. The match has always been allocated on a deferral ratio and has been almost 100% of the deferral. The NHCE deferring 20% of comp has been joined by two new participants deferring a more "normal" average of 6%.

Can I have a Non-Elective 3%, plus a discretionary PS contribution subject to vesting (which may approach 100% of the deferral amounts)?

I think I know that the amount of match above a certain amount (4% of comp, 6% of deferral - or so) leads to ACP testing.

[Tom Poje]

unclear exactly what is being asked. are you implying you have a ps contribution that is related to the amount deferred? I guess you could have, if each person was in their own group, but that wouldn't be a safe harbor contribution, and it would be subject to a(4) testing (most likely cross testing) in order to pass.

[imchipbrown]

Sorry. After a good night's sleep, I see this was a really unclear question.

What I'm trying to accomplish is to let the owners defer their $18k in 2015. They've customarily thrown $50k into the Plan as a match. The 2014 (and probably 2015) NHCE ADP will prevent them from deferring $18k unless there's a safe-harbor.

The allocation results for them would be roughly the same under a comp based allocation (straight PS) or a deferral based allocation (match). But they'll exceed the (4% comp, 6% deferral) limits and be subject to and fail the ACP test by a lot.

Since all employees are deferring, I'm thinking I can suggest a 3% mandatory contribution and a subject-to-vesting, sky's almost the limit, discretionary Profit-Sharing.

I think I'm answering my own question, now that I type it out. I don't think a straight salary ratio PS spoils anything. As a bonus, Top-Heavy can be satisfied.

[401_noob]

I have a question regarding this topic.

If a Plan Sponsor, at year end, gives a discretionary match that will fall in the ACP Safe Harbor requirement, but the ACP Safe Harbor contribution was not disclosed on the Safe Harbor notice for the Plan Year in question, can the discretionary match still be exempt from ACP testing?

The Plan provided a SH Notice prior to the Plan Year that said the SHBM will be made, but it included language that in addition to the Safe Harbor contribution, the Plan Sponsor may make additional contributions to the Plan and it referred the participant to the Plan’s SPD with a disclaimer that the additional contributions may be allocated in a different manner and subject to a vesting schedule.

Any thoughts on if the additional discretionary match will need to be tested?

Thanks!

[Kevin C]

I'm not sure I understand your question.

If you asking if a plan that provides for the basic SH match and a discretionary match that satisfies the ACP SH timely distributed a SH notice that described the basic SH match, but referenced the SPD for information regarding the discretionary match, I don't see a problem as long as the SPD has been provided to all participants. The discretionary match is covered in the SH notice content requirement under 1.401(k)-3(d)(2)(ii)(B). 1.401(k)-3(d)(2)(iii) has the rules for including content by reference to the relevant portion of the SPD and it specifically says it can be done for content described in paragraph (d)(2)(ii)(B).

[401_noob]

Yes, but just to be sure we're both on the same page, let me rephrase it.

The Plan Sponsor has a Safe Harbor Basic Match Plan and timely distributed the Safe Harbor Notice for the Plan Year ending 2014.

After year end, they have some extra money and want to allocate an additional discretionary match of 100% of the first 4%.

There was no notice that there would be an additional discretionary match when the 2014 Safe Harbor notice was distributed, but the SH notice did say that additional employer contributions may be made and to refer to the SPD.

The SPD says that the ER may make additional contributions and that they would be subject to the vesting schedule.

Will the additional discretionary match be a Safe Harbor ACP match since it doesn't exceed 4% of comp?

There are no allocation requirements on the additional discretionary match.

If you have any questions on any specifics that i didn't mention, please let me know.

Thanks!

[John Feldt ERPA CPC QPA]

You stated that no participant will be allocated a discretionary match greater than 4% of such partcipant's compensation. That's one piece of the requirements to avoid the ACP test. Most of the other pieces are in the plan's document.

Does the plan limit the amount of deferrals that will be considered for the additional match to 6% of compensation?

Does this discretionary match have any allocation conditions? Or more accurately, is there any way that an HCE could end up with a higher match than any NHCE if both deferred the same percent of pay?

Does the document spell out whether or not the plan will test the match using current or prior year testing, or does it say "safe harbor - no testing"?

[401_noob]

Does the plan limit the amount of deferrals that will be considered for the additional match to 6% of compensation? No, while the Discretionary Additional Matching condition is selected in the Plan Doc, it does not limit the amount of deferrals that will be considered for the additional match to 6%.

Does this discretionary match have any allocation conditions? Or more accurately, is there any way that an HCE could end up with a higher match than any NHCE if both deferred the same percent of pay? No, only the Plan's Profit Sharing contribution has allocation requirements.

Does the document spell out whether or not the plan will test the match using current or prior year testing, or does it say "safe harbor - no testing"? The Plan says Safe Harbor Plan/ACP test only using current year testing.

So, i suppose that would mean that the additional match is not eligible for the ACP Safe Harbor?

Thanks!

[John Feldt ERPA CPC QPA]

Yes, based on your responses, my guess would be that the discretionary match will need to be ACP tested. You can always check with the document provider for their opinion since they've written the actual provisions of the plan itself.

[Kevin C]

No, while the Discretionary Additional Matching condition is selected in the Plan Doc, it does not limit the amount of deferrals that will be considered for the additional match to 6%.

Does the plan limit the deferrals that are considered for the discretionary match to some other level? Or does the discretionary match apply to all deferrals with no limit?

[401_noob]

Does the plan limit the deferrals that are considered for the discretionary match to some other level? Or does the discretionary match apply to all deferrals with no limit?

No, it has the blank space where the limit will be written for the elective deferrals that will be considered for the discretionary match, but there isn't a limit written in the blank space.

Thanks!

[Jim Chad]

John what did I miss? which sentence gives information that says it needs to be acp tested? I'm thinking not.

[Kevin C]

Jim, from post #34, the discretionary match applies to all deferrals with no limit. That kills the ACP SH.

Another issue is that post #29 says the client wants to do a 100% match on deferrals not in excess of 4% of comp. The discretionary match has to be allocated under the terms of the plan. As described, the discretionary match applies to all deferrals with no limit.

[John Feldt ERPA CPC QPA]

Does the document spell out whether or not the plan will test the match using current or prior year testing, or does it say "safe harbor - no testing"? The Plan says Safe Harbor Plan/ACP test only using current year testing.

So, i suppose that would mean that the additional match is not eligible for the ACP Safe Harbor?

Thanks!

Jim, this above bold text, in my opinion, is a very critical item. If the written plan document had said "no testing", then it's possible that the basic document then automatically would apply the necessary requirements to make such discretionary match ACP-free, but since the testing checkbox says "test for ACP" then I think you are likely stuch having to test.

edited to add: but of course, these comments are all made without having the actual document in hand.