Safe-harbor plan with a CODA

[Guest Bruce Bonanomi]

A colleague of mine thinks he can set up a safe-harbor 401k plan with a 3% QNEC and a year end "cash or deferred" PS contribution. I tried to explain to him that if only a few participants defer their contribution into the plan and all the rest take it as cash, the plan won't pass the ADP test. He says it is a safe-harbor plan and not subject to the ADP test. Am I wrong? He says you can have a CODA with a safe-harbor plan but I think he is twisting the facts. Please help!

[Bird]

That's exactly what a safe harbor is used for, to avoid ADP testing. I'm a little confused by your terminology: "cash or deferred PS contribution."

A "cash or deferred" arrangement is a 401(k) arrangement, and "PS" is optional employer profit sharing - 2 different animals. If you meant that the company would give a bonus at the end of the year and employees would have the opportunity to defer them into the plan, that's fine.

[Guest Bruce Bonanomi]

If the company gave a 5% bonus at the end of the year and only the highly compensated employees elected to defer the bonus into the plan and all other employees took it in cash, the plan would still pass the ADP test assuming they made a 3% QNEC? This seems very disciminatory in favor of the HC.

[Bill Presson]

If the company gave a 5% bonus at the end of the year and only the highly compensated employees elected to defer the bonus into the plan and all other employees took it in cash, the plan would still pass the ADP test assuming they made a 3% QNEC? This seems very disciminatory in favor of the HC.

The safe harbor provisions are the price for allowing anyone to defer up to the maximum amount allowed each year without worrying about testing. So that's not an issue.

But I'm curious about why you feel your quote above is "very discriminatory in favor of the HC"? Especially if everyone is getting a 5% bonus in your example.