Design-based Safe Harbor Allocations

[Fred Payne]

Assume a 401(k) Safe Harbor Profit sharing Plan that elects the 3% non-elective contribution (SHNEC) to satisfy ADP. Sponsor makes an 8.22% PS contribution integrated with social security.

1 of the 3 NHCE’s terminates with greater than 500 hours and is entitled to the 3% SHNEC, but not any additional profit sharing allocations due to 1000 hour and last day employment conditions. The 1 NHC's total plan allocation rate is 3%.

The only HCE receives a 14.50% allocation rate (11.50% 401(a) including integration and 3% SHNEC). All other NHCs receive a 11.22% allocation rate (8.22% 401(a) plus 3% SHNEC).

Since all 3 NHCE’s benefit with at least a 3% accrual rate, 410(B) coverage passes. However, since one NHC only received the 3% SHNEC vs 11.22% for the other 2 NHCs plus the HCE, it has been suggested to me that the allocation formula for the PS plan is no longer a designed-based safe harbor and would need to be tested for non-discrimination under the General Test. The rationale is that the SHNEC is considered a 401(a) contribution.

Your opinions are greatly appreciated.

[Mike Preston]

I agree. Doesn't the plan easily pass the ABT, whereby the allocation to the 2 NHCE's and the 1 HCE can be tested on contributions as they will all be in the same rate group?