Cross-Tested SafeHarbor 401(k)

[Guest Fuzzy]

Is this plan design OK ???

Can you have a Cross Tested Safe Harbor 401(k) where you make a 3% Safeharbor contribution to all eligible employees. But you do cross-testing on the Non-Elective Contributions to make sure you pass the discrimination tests. Where you make the 3% safeharbor contribution that is fully vested, but you have a 2-20 vesting schedule on Profit Sharing and Match.

[Tom Poje]

not quite sure I understand your question.

a safe harbor contribution (unless it is a match) is a non elective contribution, hence its name, safe harbor NONELECTIVE contribution.

notice 98-52 VIII B clearly says the SHNEC 'may also be taken into accountfor purposes of determining whether the plan satisfies section 401(a)(4).

the only exception being you can not impute disparity on the SHNEC piece. but there is no reason you can't make additional contributions that are vested

Thus for example, you could not allocate only a SHNEC (3%) and a total of 9% to the HCEs and impute disparity for testing purposes. well, I guess you could impute disparity, but the NHCEs wouldn't change and the HCEs would increase, so it wouldn't make sense.

[Guest Fuzzy]

Your second paragraph doesn't make sense to me. Why would your HCE's increase?

We are vesting the 3% safe harbor non-elective, but have a vesting schedule for non-elective contributions we are making above the 3% non-elective safe harbor.

Someone recently told me that you couldn't have a cross-tested safe harbor plan. This prompted the question and got me thinking that mabey all non-elective contributions (even above the 3% S.H.) needed to be fully vested.

[Tom Poje]

if you give a 3% SHNEC to the rank and file and an additional 6% ps to the HCES, this satisfies the 1/3 rule.

if you impute disparity, the 3% is a no-no. therefore, the only portion the E-Bar would receive the effect of imputing disparity would be the 6% allocated to the HCEs. therefore, the HCEs would increase while the NHCE E-Bars remains at the same value. (Not a good strategy)

back to

notice 98-52 Section VII B

which says:

these contributions are not subject to the limitations on qualified nonelective contributions under section 1.401(k)-1(B)(5)(ii)

that section requires you to test 401(a)(4) once with QNECs and once without QNECs.

Back in 99 I recall reading a suggestion that all the contributions would have to be qualified non elective to satisfy BRF issues. I haven't seen that argument since.(That doesn't mean it doesn't exist, it is just I haven't seen it)

I could see a valid argument if the only allocation to the rank and file was a 3% SHNEC, and the HCEs received additional.

In that case the HCEs have received a contribution subject to different withdrawal requirements than the NHCEs. Fine, make them fully vested and subject to the same withdrawal conditions. it will break the HCEs hearts!

But if the NHCEs receive a contribution subject to vesting as well, then what do you have?

for the SHNEC, all nhces and hces received fully vested, restricted distribution.

for the additional contribution, all eligible nhces and hces received subject to vesting and not as restrictive distribution - given that I don't see a BRF issue.

[Guest Fuzzy]

(in a scenario with 3% SHNEC to all ee's and hce's getting total contrib of 9%, including their SHNEC) ---So you are saying I'm ok if i fully vest all NEC contributions? But not ok if i don't vest contrib's above the 3% ??

Can you define restrictive distribution?

[Guest Fuzzy]

Tom, I also do not understand what you are hinting at with the question; " But if the NHCE's receive a contrib subject to vesting as well, then what do you have?"

[Tom Poje]

actually what I am saying is I don't know 100% for sure.

Notice 98-52 clearly says that SHNECs are not the same as QNECs, and therefore the testing rules are different.

but that only applies to the a(4) test.

But in regards to BRF, my logic (which certainly is limited at times) says that I would have to test.

Why, because

SHNEC - 100 vested, distributions - restrictive - subject to same rules as deferrals

NEC - subject to vesting, distributions - not restrictive (generally) - e.g. you could get in service distributions etc.

so, for BRF, vesting- I dont see a problem since then SHNEC has better vesting, and all NHCEs have this

but distributions - some HCEs received a contribution they can get an in service withdrawal and no NHCEs did. I see a possible problem.

But if the NHCEs receive the NEC as well (even in a smaller amount) [as in a regular cross tested plan], then I don't see any issue because you have a scenario in which the NHCEs are on par (so to speak) with the HCEs in regards to distributions.

again, all that is my opinion. from your note it must be the case someone thinks differently at least in regards that all contributions must be 100% vested. I haven't heard that, I don't recall it being addressed at any talks at theASPA conferences and the issue is not brought up in the ERISA Outline Book, at least

not that I know of. That still doesn't prove the issue one way or another.

[Guest Rosemary Raymer]

Fuzzy, yes - your design is fine. The only thing is that everyone has to pass the gateway so the same people that get the 3% safe harbor may have to get a 2% additional contribution to get the the 5% maximum required to pass the gateway. You have to be very careful in setting up your groups for this kind of plan. One possible scenario is Group 1 = owners, Group 2 = non-owners with more than 1000 hours and Group 3 = all employees eligible for the safe-harbor contribution.

[Guest Fuzzy]

Thank you Tom!

Thank you Rosemary!

Fuzzy