Increasing the rate of safe harbor match during plan year

[Guest IU1994]

I've searched the regs and old posts and haven't found an answer to this question:

Can a plan, relying on a payroll period safe harbor match of 100% of first 5% deferred, amend to increase the rate to 100% of first 6% deferred in the middle of a plan year?

The regs clearly state that you may reduce or suspend a safe harbor match during the year, if you provide notice, amend the plan, and run the ADP test using the current year method for the entire plan year. However, I can find nothing that addresses an increase in the safe harbor match rate during the year. Can you also provide notice and amend the plan? Are you then subject to ADP testing?

[JanetM]

Could you avoid the issue and give 1% discretionary contribution for remainder of the year, then change the amount at 1/01/06?. Am thinkin you would have to test the 1% ............... would you pass or does this just benefit HCEs in general?

[Tom Poje]

Since the notice must be provided 30 days before plan year begins, not 30 days before any changes to the formula I would say you couldn't do that.

as Janet pointed out, if the plan allows for a discretionary match, I suppose you could make a match such as .2% match up to 5% deferred. This would give people 6% match on 5% deferred which is close to what you want.

[Archimage]

However, I would disagree that the discretionary match would have to be tested. As long as the notice mentions the possibility of a discretionary match, no additional testing is required.

[JanetM]

Archimage, I don't think that is the match the original post used. Yes I agree that your match would not need testing since each participant gets the same match beginning at the first dollor.

Post said now it is 100% of first five they want to make it 100% of first 6.

With your formula, person deferring 5% would get the 120% of 5%. It sound to me like they gave population that deferrs 5% or less and only a few at 6%. Expect they are trying to benefit small group doing 6% at lower cost then benefiting every one with higher match on smaller dollars.

What I was thinking was 100% match on first 1% over 5%. That would have to be tested.

[Kevin C]

See new reg section 1.401(k)-3©(4).

(4) Limitation on HCE matching contributions. --The safe harbor matching contribution requirement of this paragraph © is not satisfied if the ratio of matching contributions made on account of an HCE's elective contributions under the cash or deferred arrangement for a plan year to those elective contributions is greater than the ratio of matching contributions to elective contributions that would apply with respect to any eligible NHCE with elective contributions at the same percentage of safe harbor compensation.

The reg isn't effective until 2006, but the same type of restriction was in Notice 98-52.

Even if you could amend the SH match formula, if you had an NHCE who terminated before the formula increase, I don't think you would be satisfying this limitation.

If you use a discretionary match for only the last half of the year I think you would have a problem with the same restriction in 1.401(m)-3(d)(4). That could put your ACP safe harbor at risk.