401(k) Safe harbor Compensation

[alexa]

We added a 401(k) feature to a profit sharing plan effective 7/1/2002.

Notice 98-52 allows you to exclude Compensation prior to becoming eligible

Could one use Compensation from 7/1/2002 for purposes of calculating the 3% nonelective safe harbor contribution?

If so, a cite would be helpful

[Tom Poje]

see IRS Notice 2000-3 Q 11 (which deals with adding a CODA to an existing plan)

point #3.....the requirements of Notice 98-52 are otherwise satisfied for the entire period FROM THE EFFECTIVE DATE of the CODA to the end of the plan year. (Emphasis mine)

so, hopefully the document says the effective date of the CODA is 7/1

[alexa]

Our CODA is effective 7/1/2002

So for purposes of the 3% nonelective safe harbor , we can use Compensation from 7/1/2002 - 12/31/2002 to calculate the 3%? The plan is top-heavy with no other nonelective contributions for the year

[QDROphile]

Make sure that your plan terms specify that for the first year of the CODA the special definition of compensation applies for purposes of the 3% contribution. If you don't, you could end up with a plan that says the participants get 3% based on the entire year if the definition of compensation already in the plan for purposes of contributions refers to the entire year.

You may also may have compensation defined for puposes of contributions to be limited to the portion of the year after the participant becomes eligible for the contribution, such as at mid year entry dates.

The plan terms will control and may be more generous than the minimum required by the law.

[ccassetty]

Also remember that the top heavy minimum contribution allocation must be based on total year's compensation. If the 3% safe harbor is to count for the top heavy contribution, it must be based on total year's compensation.

You could put in the 3% 401(k) safe harbor minimum based on the partial year's compensation, but then there would still need to be an addition PS contribution to bring the non-keys up to the minimum 3% top heavy based on total year's compensation. This way, the additional top heavy minimum could be subject to the plan's vesting scale.

[alexa]

I thought for 2002 plan years and later EGTRAA got rid of top-heavy for safe-harbor plans that are just allocating the safe harbor and no other employer contributions?

[Mike Preston]

Ithink your original post indicated that you had "added" a 401(k) feature to an existing PS plan. You are correct that if you simultaneously decided that there would be no non-safe-harbor contributions the plan would satisfy the exception and not be required to provide TH minimum allocations. Note, however, that if the PS portion of the plan has any forfeitures the plan might not satisfy the exception.

[ccassetty]

OK, I'm confused.

Maybe I'm reading it too literally, but my copy of section 613(d) of EGTRRA says:

"Definition of Top-Heavy Plans - Paragraph (4) of section 416(g) (relating to other special rules for top-heavy plans) is amended by adding at the end the following new subparagraph:

(H) Cash or deferred arrangements using alternative methods of meeting nondiscrimination requirements -The term "top-heavy plan" shall not include a plan which consists solely of-

(i) a cash or deferred arrangement 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."

This seems to limit this exception only to plans that consist solely of the deferrals and safe harbor match and does not seem to extend it to the 3% non-elective. Please tell me what I'm missing.

[Tom Poje]

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

this refers to the ADPsafe harbor, which could be 3% SHNEC or BAsic Match or Enhanced Match

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

This refers to the ACP safe harbor only. the 3% SHNEC is not used to satisfy this test

so the 3% is ok to prevent the plan from being considered top-heavy. Well, of course, if everybody received 3%, including termineed the plan would have satisfied top heavy anyway. (except that you could use comp from date of participation)

[Guest jody303]

ccassetty: I had the same mindset as you did on safe-harbor plans being deemed non-top-heavy, but reading Tom's post and checking the law, I agree with what Tom is saying.

Tom Poje: However, now I'm going to get really really literal. The law refers to a plan consisting solely of a CODA meeting the requirements of 401(k)(12) AND matching contributions meeting the requirements of 401(m)(11). Does this mean the plan MUST have matching contributions meeting the requirements of 401(m)(11), as well as an ADP safe-harbor contribution (of whatever type) in order to be deemed non-top-heavy? I'm focusing on the "AND" at the end of clause (i). (I told you I was being really literal here!)

[Tom Poje]

I have read and re-read various notes, etc on safe-harbor plans and will quite possible continue to scratch my head on the issue. It does not surprise me that I am not alone being confused. This is my understanding:

401(k) safe harbor actually has 2 parts:

1. ADP safe harbor (absoultely nothing to do with ACP safe harbor)

to pass

a. Basic Match

b. Enhanced Match

c. SHNEC

end discussion on ADP safe harbor.

2. ACP safe harbor

to pass

a. If you used the Basic Match above, you are ok

b. If you used the enhanced match above, you are ok as long as you only matched up to 6% of deferrals

c. The SHNEC does not count at all. do not pass go, do not collect $200.

however, if you used the SHNEC you could provide a discretionary match, limited to 4% of compensation.

If you provide the SHNEC, and no discretinary match, then there is no ACP test since there is no match. Last I checked if no one received a match you pass ACP testing (unless of course you have a post tax contribution)

d. I believe you could also provide a required match up to 6% deferred(e.g. 50% of deferrals) and the 4% cap would not apply.

now, what happens if your plan provides for the SHNEC and no discretionary match (in the language)? Interesting, because of the word 'AND' you note above, I would say you fail the top-heavy free ride. This would only be a problem if you had immediate eligibility but used the one-year wait on the SHNEC, because SHNECers are getting 3% - ok maybe not because you might be using comp from date of particiaption. This is slightly different than the case where the document actually provides for a discretionary match capped at 4% of comp, but provides 0 for the year. really getting picky on symantics at this point. so you might as well always put the option in the document for discretionary match even if you never use it.

Not sure why or if someone would ever set up a plan to provide a SHNEC and then a Basic Match or enhanced match as well. Logically that makes no sense to me.

[Guest jody303]

Thanks for your analysis, Tom. This is symantics, I agree, but I think your logic should work. I don't think it makes sense to have a SHNEC and basic or enhanced match either. So, the discretionary match language in the document may work to allow a plan to be deemed not TH.

Thanks again.