Safe Harbor

[pmacduff]

I apoligize if this has been covered on the boards before...and I know this should be simple...

I have a safe harbor 401(k) Plan - no eligibility requirements, entry is date of hire. Employer uses safe harbor match formula. Employee hired in March of 2003, but does not begin deferring until July. I know the safe harbor is 100% up to 3% deferred and 50% of the next 2% (4%-5%). When I run the discrimination test at the end of the year, (immediate eligibility), the test will look at deferrals from July - Dec, but compensation from March - Dec. This will make the employees annual % lower than it actually is, of course. How do I compute the safe harbor match for this employee, based on the amount deferred/associated compensation or on %tage deferrred/associated comp? As an example, let's say the employee is deferring 4% beginning in July. Their comp is $10000 from Jul - Dec, so they defer $400. At year end, total comp is $18000. Annual ADP % = 2.22%.

Is the safe harbor match due $400 (100% up to 3%, participant at 2.22%) or $350 (100% of 1st 3% deferred and 50% of next 1%). Assume the Employer is depositing the match annually. Again - I know this should be easy, but I've gotten stuck here and can't get past it. Thanks in advance for input.

[E as in ERISA]

The plan's definition of compensation should tell you whether it is compensation for the plan year or compensation from the date of participation (usually the former, unless it specifies the latter). But the date of participation is the date on which the employee becomes eligible -- not when they start deferring.

See Notice 98-52, Pt IV, Sec B.

[WDIK]

First, I assume (never wise) that the plan language defines the safe harbor match with language such as "an amount equal to the sum of (a) 100% of elective deferral contributions up to 3% of your Compensation, and (b) 50% of your elective deferral contributions above 3% up to 5% of Compesation.

I also assume (no we're in dangerous territory) that because of the immediate eligibility that Compensation will include salary since date of hire.

The terms of the document should clarify the definition of Compensation.

EDIT: (Beat to the punch)

[pmacduff]

Compensation is defined as plan year comp while a participant. No eligibility - Entry date=date of hire - therefore compensation is from date of hire. I know that date of participation is eligibility date, not the date deferrals begin. Since that is the case, I gather you both are saying this participant would get the $400, not $350, right? Would your answer change if the safe harbor deposits were being made on an ongoing basis (say per payroll) as opposed to annually? If that were the case, with the participant at 4%, he would only end up with $350 match on a per payroll basis by year-end. Would that then need to be "trued up" to $400 at plan year-end? Thanks again. Patti

[E as in ERISA]

Yes. $400. If you do payroll matching, then no true-up is required. See Notice 2000-3, Question 2.

[pmacduff]

Katherine -Thanks so much for the info...I feel better now! It appears it will benefit the client to have the safe harbor match deposited on a per payroll basis with deferrals. It's a smaller client and I know that $50 doesn't seem like much, but every little bit helps, right? Thanks again...