2006 Safe harbor plan with restrictions on match contribution

[blue]

The regulations in effect as of January 1, 2006 state that, to remain except form 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.

The plan I am looking at has the 3% nonelective safe harbor provision with an additonal discretionary match which has no allocation conditions for active employees but requires terminated employee to work 501 hours to receive the match.

Someone in our office is agruing this regualtion would not apply to this plan.

Your thoughts would be appreciated.

[JanetM]

IMHO you will still have to pass ACP test since this isn't safe harbor match.

[Tom Poje]

nothing to be humble about - that is the rule, plan has to be tested for ACP. ADP gets free ride.

no fair cheating and shifting deferrals to help testing either.

[Dan]

Didn't it used to be that a discretionary match could satisfy the ACP Safe Harbor test as long as the ADP Safe Harbor was met, match rates for HCEs were the same as NHCEs, deferrals in excess of 6% were disregarded and the match was capped at 4% of compensation? But the final 401(k) regs don't allow the allocation condition.

[Tom Poje]

I believe the preamble to the final regs was something like

'this "clarifies" if you are eligible to defer then you are counted in the ACP test. thus, if you put an allocation restriction on the discretionary match, this will result in some HCEs receiving at a higher rate of match than any NHCE included in testing, therefore safe harbor will fail.

my guess is that it was always intended this way. since the IRS used the term clarify I think they realize things were not real clear, and therefore probably little that they can do about how things were run in the past.