Safe harbor 401(k) plus cross-tested PS plan

[Guest Dave Peckham]

Notice 98-52 states that a safe harbor nonelective contribution used to satisfy the 3% nonelective contribution requirement may also be taken into account for purposes of determining whether a plan satisfies the nondiscrimination requirements.

The final regs affecting cross-tested plans and requiring minimum allocation gateways came out in 2001.

Assume a cross-tested safe harbor 401(k) plan has at least 1 HCE with a PS allocation of over 15%.

Thus, Notice 98-52 didn't have a chance to address whether a safe harbor nonelective contribution used to satisfy the 3% nonelective contribution requirement can also be taken into account for purposes of whether the plan satisfies the 5% minimum allocation gateway, but the general rule stated in the first paragraph above suggests that a 3% (100% vested) safe harbor nonelective contribution plus a 2% (2-20 vested) contribution together could satsify the 5% minimum allocation gateway.

Conversely, if the safe harbor 401(k) uses a safe harbor matching contribution to avoid the ADP/ACP tests, it appears that if at least one eligible NHCE defers 0%, an additional 5% (2-20 vested) contribution needs to be made to all benefitting NHCEs in order to meet the gateway.

Comments?

Has there been any guidance on point since?

Dave Peckham

[Tom Poje]

in order to even be able to cross test a plan must 'pass through the gateway'

one way to pass through the gateway is provide a 'nonelective contribution' of 5% (or less if the HCE has less than 15% nonelective)

Nonelectives = just what it says. nonelectives.

Is a QNEC a nonelective? yes.

is a SHNEC a nonelective? yes

is a QMAC a nonelective? no, its a match

is a SHMAC a nonelective? no, it also is a match.

[stephen]

1) For example, if HCE wants 15% total contribution. You may reduce 15% by 3% safe harbor which leaves 12% profit sharing. Thus, the staff would need to receive 1/3 of 12 = 4% profit sharing contribution to meet the gateway.

2) Immediate 100% vesting only applies to the 3% nonelective for the safe harbor.

3) The net contribution for the staff comes in two pieces totaling 7%. 3% is safe harbor nonelective contribution and is 100% vested and 4% profit sharing contribution allowed to follow a vesting schedule.

[wmyer]

Disagree with last post. If employer wants 15% contribution, this can be 12% PS plus 3% SHNEC. Gateway would be 5%, which would be 3% SHNEC plus 2% PS. The total contribution would be 5% for the staff, which would then be tested for general nondiscrimination.

[Guest kangerooster]

I'm with wmyer, this is how we have been handling our 3% nonelective safe harbor with Profit Sharing and New Comp plans.

[stephen]

I thought that may be the case-

I am a new user of Pension Online and the cross tested allocation with 3% safe harbor nonelective contribution seemed to be allocated as I explained.

Any ideas?

[Guest kangerooster]

Stephen:

I believe if you can pass the gateway by allocating on 5% to the second class of employees and (3% safe harbor and 2% discretionary) you could allocate 16% (3% safe harbor and 13% Profit Sharing) or more to the first class (provided you pass the the other tests of course!). There are cases where you can allocate 5% (3% safe harbor and 2% discretionary) to the second class and actually give the first class (first class meaning owners) $40,000.

I am new to the message board and appreciate any feedback!

[Tom Poje]

kangerooster:

welcome aboard. I think you have it correct. the SNHECs count as a nonelective in determining the gateway minimum.

I will go out on a limb and guess that some people may be interpreting the part of safe harbors that says 'may be used'... as meaning one doesn't have to.

(e.g. a match 'may be used' to satsify top heavy, but you don't have to)

Why you would want to ignore the SHNEC and give the NHCEs more is beyond me, especially in a cross tested plan is beyond me.

[jquazza]

There's one more thing you have to pay attention to, if you input permitted disparity on your Xtest, you cannot input it on the SHNEC.

[Blinky the 3-eyed Fish]

Mathematically, you will find that this rule has very little impact on the testing.

[jquazza]

Blinky, I am surprised by your comment. Very little impact doesn't mean no impact, and if you're calculating your contribution to the penny to make it pass (a)(4) and inputted permitted disparity on the SHNEC, suddely you fail nondiscrimation, is this what you call little impact?

I agree it has little impact on the contribution amount, but it is still something we should be aware of when testing.

And by the way, you don't even have to use cross testing for this rule to apply, so when testing on contribution basis, the impact is definitively not minimal.

[Blinky the 3-eyed Fish]

Jquazza, you didn't undertand at all what I meant by my comments. In no way was I saying that you can ignore the rule or that getting close enough is sufficient.

I was saying that the testing is generally not impacted by the rule that you cannot impute permitted disparity on the SH nonelective. (Now note that, as is discussed in the topic, I am talking about a cross-tested plan, not testing on a contributions basis.)

I don't have time to run through the math, so I will leave that to you. Just pick a few tests that have been run by you in the past and see the difference in the end result if you ignored the rule or if you didn't. That will give you the impact of the rule.

[Tom Poje]

basically a person within 14 or so years of retirement who is given an additional 2% ps contribution to satisfy the gateway minimum will have an EBAR of .65 on that 2% alone. therefore that person will be able to impute at the maximum anyway.

usually to pass testing you are not depending on a 51 year old to help pass testing.

[jquazza]

Tom,

I agree with you in most cases, however, you still have to pay close attention to it, especially if the ER Nonelective is not that much:

example: 3% SHNEC Onwer wants 10% NEC total (addt'l 7% PS)

Gateway for other EEs: .34%

You can't use .65 for your maximum disparity.

[Blinky the 3-eyed Fish]

I know I didn't say that you didn't have to pay close attention to it, and if I may be so bold, neither did Tom. There is no disagreement here.

Conclusion: know the rule and pay attention to the rule. The rule will have little impact, but that doesn't mean you ignore the rule. In other words, don't forget the rule (i.e. remember the rule). What I am trying to say is that when you learn some new information and feel you must purge some already-gained knowledge, then this rule is not something to purge. Instead maybe purge the number of career home runs of Reggie Jackson.