Do you True Up a Basic Safe Harbor Match at the end of the year?

[TBob]

A Safe Harbor 401(k) plan utilizes the Basic Safe Harbor Matching Contribution of 100% on the first 3% of deferrals plus 50% on the next two with no other employer contributions being made to the plan. The document (PPD Prototype) says "compensation for this purpose is compensation for each payroll period."

I have always taken this to mean that you do not true up the match contribution at the end of the year based on total deferrals and total compensation. This would not bother me so much if it was not a safe harbor contribution. Some participants are getting more (or less) than a 4% match when they defer a total for the year of more than 5%.

What about the guy with 200,000 in comp that defers up to the 12,000 limit and ends up with more than 8,000 in match.

[Jed Macy]

As I recall, the IRS said that is okay to calculate the safe harbor match on a payroll-by-payroll basis. Thus, you not only need not true up the match, but doing so might be inconsistent with your plan document.

See IRS Notice 2000-3's Q&A-2 on page 415 of Internal Revenue Bulletin 2000-4 published 1/24/2000.

[Blinky the 3-eyed Fish]

Tbob, how would someone get more than 4% if the match is determined each payroll period? Unless an error was made, I don't see how that is mathematically possible. I have never heard the phrase, "true down".

[TBob]

Blinky...I am struggling with the same question. True down doesn't work for me either! As the one testing the plan, all I can say is that the employer has some problems with their payroll system. My guess is that since this HCE received more than 200,000 in comp, that the employer did not stop the match when they were supposed to. I think I have some consulting work to do!

Let's assume that HCE was making 30,000 per month. He decides to defer only 1,000 each month to hit 12,000 by the end of the year. Since 1000/30000 is only 3.33% deferral and you are matching on compensation for the pay period, he would receive a match of 3.165% each month or 949.50 for a total by the end of the year of $11,394.

The employer needs to cut him off at 8,000 for the match or the HCE will get a match that is calculated on >200,000 comp for the year. Correct? I don't think that matching on a payroll by payroll basis is meant to be a loop hole to get past the comp limit.

[Blinky the 3-eyed Fish]

You are correct that you cannot circumvent the 401(a)(17) limitations. Although, I can see how the company could make a mistake like this. Consult away and guide them under your steady hand.

[JDuns]

I actually have a TPA who insists that the match should cut off, not at $8,000 (which I believe is the correct answer) but as soon as the calendar year compensation hits the compensation limit.

The TPA would let the deferrals continue but insists that the match must stop (so the employee actually gets $6,330 in match in the example above). The in-house lawyer at the TPA argues that the only way to bring the HCE back to $8,000 to provide a year-end gross-up for all employees.

Has anyone else ever heard of this argument.

[Harwood]

JDuns - I've heard that too.

Employer contributions - match and profit sharing - can only be based on the FIRST $200,00 in compensation; whereas employee deferrals can be on all compensation.

So I've heard.

[Kirk Maldonado]

Don't you have that same issue relating to the compensation base with respect to regular (i.e, non-Safe Harbor) matching contributions?

[QDROphile]

When are people going to get that the 401(a)(17) limit is a dollar limit and not a timing rule? We have been through this so many times on this Board that I am amazed to see intelligent and informed persons still trifling with the notion.

[Blinky the 3-eyed Fish]

I once truffled with a notion, but only got my snout dirty and didn't solve anything.

[Brian Gallagher]

Where does it say that match is on the FIRST $200k?

What if somene makes $400K in a year. If that person choses not to defer until July (assuming her income is even over the year), the she would get absolutely no match??!!??

[Harwood]

The initial question states that "compensation for this purpose is compensation for each payroll period."

It seems to me that in this case compensation accumulates every payday. Therefore only the first 200/205 thousand can be matched.

Perhaps someone can direct us to a prior thread where the issue of "the 401(a)(17) limit is a dollar limit and not a timing rule" is discussed in the context of a Plan that defines compensation on a payroll-by-payroll basis.

[Guest Christopher Tipper]

Well, it was around January of this year when I first got this idea myself. I was sure I wasn't the first to have thought of it, though. And, yes, it's taken me 7 months to come here and post on this subject as well.

Having, read the existing arguments, and having just re-read 401(a)(17), and the Adoption Agreement and the Document that I use, I have yet to find anything that indicates that when we have a Safe Harbor Match on a per pay period basis with no true up, that the Safe Harbor Match is limited to 4% of 401(a)(17) Compensation.

If Compensation Computation Period is listed in your adoption agreement or document as "per pay period,"

And, your document's definition of Compensation refers to the Compensation Computaton Period

And, there is no "true up"

Then as long as your Compensation for your Compensation Computation Period is less than the 401(a)(17) limit, by the terms of the document, how can you not provide the Participant with a Safe Harbor Match?

Is there anything in the Code, the Regulations, Notices, anything like that, that states that the Safe Harbor Match in no event can be greater than 4% of 401(a)(17)?

If there isn't anything like that in print, then I think we need to take the opposite tack with how we consult with our clients. We should be advising our clients that make well in excess of the compensation limit that they should spread out their deferrals and have the Plan set up to match each pay period without true up.

[Guest Pensions in Paradise]

Notice 98-52

[Brian Gallagher]

As for the notion that only the FIRST $200,000 be considered for compensation, it has been gone over a dozen times here. Here is one of them:

http://benefitslink.com/boards/index.php?showtopic=22836' target='_blank'>

I believe is: it doesn't hmatter which $200k is considered, as long as it is only $200k.

A small example:

An HCE who makes $400,000/yr is eligible to participate on Jan 1, but declines. He makes $200,00 as of June 30. He decides he wants to participate on July 1. The counter-argument to my position seems to say this person cannot participate becasue he cannot defer (or get match!) on anything past his first $200k. To me it doesn't make sense.

[Brian Gallagher]

ooops. forgot to put in the link (still getting the hang of posting URL's on this site)

anyway, the topic has been done to death (the first 200k bit), so a search of benefitslink should yield something.

[rlb64]

Just as with plan imposed deferral limits, there is a maximum match amount based on the comp limit. I would calculate the match per payroll and stop matching once the maximum is reached.