Safe Harbor Plan--What testing is needed?

[sloble@crowleyfleck.com]

We have a design-based safe harbor 401(k) Profit Sharing. It requires a 3% safe harbor employer contributions and permits an annual discretionary profit sharing contribution. WHat tests do we need to perform? I believe we need to test for Top Heavy status because of the discretionary contribution. What does this entail and is there anything else we need to do?

I'm getting conflicting answers--thanks for the help.

[Blinky the 3-eyed Fish]

I believe we need to test for Top Heavy status because of the discretionary contribution.

You need to do this in any case where a key employee gets an annual addition.

What does this entail and is there anything else we need to do?

This testing entails more than can be explained here. However, your safe harbor nonelective will meet the TH requirement if it's based on full year's compensation.

[sloble@crowleyfleck.com]

Thanks very much. Are there other tests that apply to a safe harbor plan like ours--I 've been told that we are exempt from the ADP/ACP testing and so the Top Heavy test is all that's left.

[TBob]

As Blinky said, the full range of testing is complex and probably more than we want to try to cover in this one post. Can you be more specific about the plan design and the tests you are concerned about?

Your original post does not give much information about the plan design which makes it more difficult to answer the question. A "design based safe harbor" could mean a lot of different things in this business depending on the context of the discussion.

A few tests and/or limits that you may need to worry about are coverage, 402(g) deferral limit, 415 annual additions limit, deductability, BRF, and general non-descrimination for your non-elective contributions. A good plan design could eliminate most of the potential for failing some of these tests but that does not mean that you can skip them altogether.

[Tom Poje]

Becasue there is a discretionary contribution (assuming one is made) you might have to perform nondiscrimination testing.

you pass coverage because all ees receive the SHNEC.

However, consider the simple case of an additional 7% profit sharing contribution being made. and, by bad luck because of hours requirement or last day provision only the HCE received this contribution. this means you have HCE at 10% total and NHCEs at 3%. you would have to perform the general test. this example would fail testing on an allocation basis, but might pass on an accrual basis - which would require the gateway minimum.

Hopefully the above wouldn't happen, and you would have at least 70% of the NHCEs receiving the 7% as compared to the HCEs receiving the 7%. then you should be able to pass on an allocation basis.

[TBob]

you pass coverage because all ees receive the SHNEC.

...assuming the plan does not exclude anyone. The plan could be written to exclude certain employees (ie. Division X, custodial staff, etc.). Coverage could still be an issue depending on plan provisions that we are not privy to.

[Blinky the 3-eyed Fish]

Nothing in your posts says you are exempt from ACP testing. However, you may pass because no match is being provided.

I am not saying this to be mean or condescending, but I hope you have knowledgeable people to verify your work (on vacation right now?). Your questions are very very basic, so without those people, I fear this and other plans are at risk.

[Guest Giovanni]

Blinky...your reponse was somewhat condescending. This message board is not just for an elite few knowledeable people. It should also be a place for less experienced people to learn. You are under no obligation to answer a question.

[Blinky the 3-eyed Fish]

I have taken over too many plans where unknowledgeable people were administrating them. Because plan administration is largely unregulated, there is a wide disparity of service provided. Woe to the client with service on the low-end.

Maybe I have it on the brain due to a recent takeover where the prior TPA is costing the client tens of thousands of dollars, but I was just making the comment to point out there needs to be a knowledgeable person in the loop.