Safe harbor match testing

[Guest scompliance]

If you retain an hour rule or employment on the last day rule with a discretionary match in a safe-harbor 401(k) plan------do you have to test both the ADP & ACP percentages or just the ACP?

[MWeddell]

You're not allowed to do this for a safe harbor 401(k) plan because if you have just 1 HCE who receives the discretionary match and 1 NHCE who does not, then you've violated Treas. Reg. 1.401(k)-3©(4)'s limitation on HCE matching contributions and you no longer have a safe harbor 401(k) plan.

I'm assuming that you're using safe harbor matching contributions, instead of safe harbor nonelective contributions, to satisfy the safe harbor rules.

[Tom Poje]

It was never possible to use discretionary match for ADP testing.

and to get to ACP testing under safe harbor you must pass ADP safe harbor,

so that implies you have either a SHNEC or a SHMAC plus a discretionary match.

now, if you have a SHMAC, then you can run your ACP test on all match, or match above 4% (since that would be the amount of Basic Match that would satisfy ACP safe harbor. see Notice 98-52 VIII F 3.

This of course applies to plan year beginning 1/1/06. the IRS has basically indicated they will not enforce things in a prior year as the new regs are a clarification of how they want things done in regards to safeharbor.

no shifting is permitted

[blue]

Tom,

Are you saying, if you have a safe harbor match with an additonal discretionary match that has EOY requirements, you still have a safe harbor plan design but have to test the additional match?

The plan I am looking at a plan that provides a 100% of 4% safe harbor match and an additional 1% discretionary match with EOY requirements.

So I would either have to test the entire match or the additonal 1% discritonary match and the ADP test would automatically pass?

[Tom Poje]

Gold Star to the smiling face in the back row.

though the actual order works something like this

plan has basic match, so plan passes ADP safe harbpr.

since plan passes adp safe harbor proceed to acp test.

plan has some match that does not meet requirements for safe harbor. (but has some that does)

so either test on all match (as if no safe harbor)

or only on amounts that do not satisfy safe harbor (e.g. the 1%)

no requirement to be consistent from year to year whatever woks.

[blue]

Tom,

Thanks, I really appreciate your help.

[MWeddell]

Well, Tom Poje is usually a reliable source and I've been wrong on these boards before, but I'll have to disagree. Treas. Reg. 1.401(k)-3(c )(4) prohibits a plan that uses the matching contributions method from allocating a higher rate of matching contributions to an HCE than the rate allocated to any eligible NHCE with elective contributions at the same percentage of safe harbor compensation. The prohibition applies to all matching contributions, not just to the qualified matching contributions used to satisfy the safe harbor rules.

My answer to blue's question is that if you have a discretionary match that requires employment on the last day of the plan year to receive that allocation, your plan no longer meets the safe harbor requirements (unless one is using the 3% of pay nonelective contribution method).

[Tom Poje]

MWeddall:

personally, I think there are times in which people are smarter to disagree me anyway.

I am unclear on your response. are you saying the entire plan fails safe harbor, or just the ACP?

If just ACP, then we certainly agree. If entire plan is deemed to fail, then I think you would have a problem with an enhanced match at 100% of the first 8% because that would fail ACP testing, but there is nothing I have ever read that says the whole plan fails.

I think you raise an interesting point when it comes to ACP testing. Is it: Basic Match passes ACP, so it can be excluded from testing, disretionary fails safe harbor because of eligibility conditions, must test that.

or is it the sum of the two fails safe harbor, therefore you have to test all.

as a general rule, you would probably better testing all anyway, though I can think of some examples where you might not want to.

certainly with after tax contributions, you are entitled to test just the after tax, or you can combine with the safe harbor match as well.

[MWeddell]

By having a discretionary match allocated only to those employed on the last day of the plan year (and assuming there is at least 1 HCE who is employed on the last day of the plan year and 1 NHCE eligible to make 401(k) contributions at same point in the plan year but who wasn't employed on the last day of the plan year), then the 401(k) and the 401(m) portions of the plan both fail to satisfy the safe harbor rules and both ADP and ACP testing is required. The regulation I've cited twice now is in the 401(k) regulations, not the 401(m) regulations.

This is different from the situation you mentioned where one matches deferrals in excess of 6% of compensation. In that case, one was violated the rules for the 401(m) safe harbor not still satisfied the 401(k) safe harbor rules. That's a different situation that what we've been discussing in this thread.

Hopefully that clarifies my position.

[blue]

Thanks for all the responses.

I actually incorrectly posted my original question

The plan I am looking has a 3% SHNEC with a 25% of 4 % match allocated to participants who are employed at the end of the year with 1000 hours.

I agree with Tom. The ADP automatically passes and the match needs to be tested.

Please note, I am saying I agree with Tom – not that my conclusion is correct!

See below commentary from the McKay Hochman website:

Within limits, a safe-harbor plan may make additional non-safe harbor matching contributions without triggering the actual contribution percentage (ACP) test, as long as:

The discretionary matching contributions do not exceed 4% of compensation,

The matching contributions are not made on deferrals that exceed 6% of a participant’s compensation, and

The rate of match for any HCE is not more than that of any NHCE.

Failure to comply with these restrictions will require the plan to run an ACP test. It is possible for a plan to be exempt from the ADP test but be required to run the ACP test for failure of any of the above items.

The final regulations state that, to remain exempt from ACP testing, all matching contributions must be allocated on a nondiscriminatory basis. Placing an allocation restriction, such as a last-day rule or a 1,000 hours-of-service requirement, on any matching contribution provided by the plan is discriminatory unless all non-highly compensated participants satisfy the restrictions.

Example: A safe harbor 401(k) plan with a 3% qualified safe harbor nonelective contribution (QNEC) and a discretionary match of 50 cents on a dollar up to 6% of deferred compensation will satisfy the actual deferral percentage (ADP) safe harbor test. There are 35 participants. 30 of whom are non-highly compensated employees (NHCEs) while five are highly compensated employees (HCEs). The plan has not made matching contributions in excess of 6% or allocated a discretionary match of more than 4% in total. However, the plan has a last-day and a 1,000 hours-of-service requirement applicable to the discretionary match. Three NHCEs left employment before the last day of the year and although 4 NHCEs were employed on the last day of the year they did not satisfy the 1,000-hours-of-service requirement. All five of the HCEs were employed on the last day of the year and all satisfied the 1000-hours-of-service requirement. All five HCEs would receive a 3% match. Only 23 of the 30 NHCEs would receive a 3% match. The final regulations made clear that this would result in a discriminatory allocation requirement and, thus, the ACP test would be required to be run. The surest way to avoid the ACP test in a safe harbor 401(k) plan is to eliminate allocation requirements on the discretionary match.

[Tom Poje]

mWeddell - you almost convinced me by saying that your cite comes from the 401(k) regs. however, under those definitions, there is no mention of discretionary match - only the basic match and the enhanced match.

the discretionary shows up in 1.401(m)-3(d)(3)(ii), so I would still hold any limitations (e.g. last day) would apply only to the ACP test. zoinks, making me read the regs!

[MWeddell]

Tom -- then perhaps we'll have to just agree to disagree. Looking at the 401(k) regulations regarding safe harbor matching, when the IRS wants to refer just to qualified matching contributions, it does so. When it writes "matching contributions" as in the regulation I'm relying on, it seems clear me that it includes all matching contributions including any discretionary match that one wants to try to add on.

Blue -- Now that I understand that you're using the 3% nonelective method of satisfying the safe harbor, then those facts are different from what I had assumed before, so my conclusions don't apply to your situation.