safe harbor 401(k) and the 6 percent match

[Guest lskin]

A business owner has five employees and wishes to adopt a Safe Harbor 401(k). They will do the basic matching to satisfy the Safe Harbor requirements . In addition to the basic match they will match up to 6% of compensation(anything above the basic match will be discretionary) . Will this satisfy the ACP testing?

[Guest TGeer]

Yes. Safe harbor match needs to be vested. Match rate on higher-rate deferrals can't exceed 100%.

[Bird]

If the extra match is discretionary it is limited to 4% of pay.

[austin3515]

I think to say it completely, the discretionary match cannot exceed 4% of pay, and cannot be determined by taking into account deferrals in excess of 6% of pay...

Even if I'm not right, it's clear there's some restrictions - if your designing a plan for someone, you'd better research it pretty thoroughly!

[Tom Poje]

for example, the discretionary could be

66.6% of the first 6% deferred. This would result in the discretionary match being limited to 4% of compensation.

the discretionary match can use a vesting schedule, but you can not have an hours requirement or last provision.

[Guest lskin]

Okay. So if I write into the Safe Harbor plan that everyone will get a dollar for dollar match on the first three percent of compensation and then fifty cents on the dollar match for the next six percent of compensation ( I will not be using the three percent non-elective) then this will pass the ACP test?

[Archimage]

No, because now you have matching contributions on the first 9% deferred. You are limited to the first 6%.

[Guest lskin]

But you haven't matched more than 6 percent of compensation. Are you saying that you would have to do the basic match for the first five percent of compensation and then fifty cents on the dollar for the next one percent of compensation? The end result would be that a person only gets a 4 1/2 percent matching contribution.

[Archimage]

For the match formula stated in the document, there is no dollar limit. You could do a 300% match on the first 6% if you wanted. You can't match on deferral rates above 6%. The discretionary match is different. You do have a cap of 4% of compensation with the discretionary match.

[Tom Poje]

what you want would be the basic match

100% of first 3% and 50% of next 2%

then you want a discretionary match, lets say 66.6% of the first 6%

the net effect would be (unless I messed up somewhere)

166.6% on the first 3%

116.6% on the next 2%

and 66.6% on the next 1%

0% on any deferrals above 6%

this will yield more than 4% of comp overall, but that limit is on the discretionary piece only.

[Guest lskin]

I am really confused. Are you saying to do the mandatory basic match and then on top of that match do a discretionary match of 166% on the first 3 percent? That would mean a person would get a $2.66 match for every dollar they would put in for the first three percent of their compensation.

Maybe I am making things harder than what they are.

I am just asking if I start a Safe Harbor plan for an owner and his five employees (they are NHCE) and I want to use the mandatory matching and then some, what is the maximum I can match using the basic formula and not be subject to the ACP testing? And then what I do above the basic match does it have to be written in the plan or can it be discretionary? I doubt the employees will partcipate much.My main concern is that I want to match as much as possible and not be subject to ACP testing. I do not want to do the non-elective

[Tom Poje]

no, not quite what I said.

I said the combination of the two (basic plus discretionary) would be 166.6% on the first three.

what you dont do is the basic, and then tack on the discretionary only on amounts 5% deferred. that you can not do. (or 50 cents on amounts above 3% because one you go above 6% of comp you would have to test)

[Bird]

I think this is what you want:

Basic match - required. 100% of the first 3% plus 50% of the next 2%.

Optional match. Not to exceed 4% of pay and not to be calculated using deferrals in excess of 6% of pay. So if the guy you're designing this around earns 200K, and defers 14K in 2005, you can do a discretionary matching contribution of 4% or 8K. As a percentage of his deferrals, this is 66.67% as Tom Poje noted above (you can only consider the first 12K of deferrals, or 6% of pay). So you're going to match everyone to the tune of 66.67% of deferrals, but limit deferrals (in this calculation) to 6% of pay.

It needs to be permitted in the document, but it is in fact discretionary.