SAFE HARBOR AND CONTROLLED GROUP

[Earl]

2 Cos. are a controlled group.

Co 1 has no owners on payroll, no HCEs, no Keys.

If Co 2 has Safe Harbor provision in the 401(k). Must Co 1 also have Safe Harbor provision?

Co 2 has about 50 EEs and Co 1 has 4 so coverage issues are not in play. No other plans or contributions other than 401(k) defs and SH match in each company.

Thanks

[Tom Poje]

assuming you have 2 separate plans, and each company can pass coverage on its own, you are correct.

regardless since you can not aggregate a safe harbor with a non safeharbor that had better be the case

[Earl]

Thanks -

I kept thinking something about "universal availability" - but I think maybe that is catch-up contributions...

I appreciate you taking the time to respond.

[Guest Rags]

you can not aggregate a safe harbor with a non safeharbor

Tom,

Where is this cited (code, explanations, regs, etc)?

Thx.

[Tom Poje]

its cleverly hidden in 1.401(k)-1(b)(4)(iii)(B) the very last sentence.

[K2retire]

I thought the fact that you can't aggregate a non-safe harbor with a safe harbor, but the members of a controlled group must be tested as one employer meant that both companies had to be safe harbor or neither could be.

[Tom Poje]

we know if you have a controlled group, you have to include all employees for coverage purposes.

if you aggregate for coverage, then you have to aggregate for nondiscrim (ADP testing) as well.

but you can't do that unless both plans use the same testing method - but there is no requirement that all members be safe harbor.

Otherwise the regulation (1.401(k)-1(b)(4)(iii)(B)) that says you may not aggregate a plan using ADP safe harbor provisions with another plan that is using the ADP test makes no sense. (This particular section of the regs will refer you to 1.410(b)-7(d) which are the rules for permissive aggregation (refers you to the 'employer' choosing how to treat 2 or more plans, including QSLOBs, etc)

Under what other circumstances would you have the situation arise where you would have a non safe harbor 401(k) and a safe harbor 401(k)? you can't (Tom corrected his typo) aggregate a plan with a non-related company.

I suppose you could have an odd company that sponsors both a 401(k) plan and a safe harbor 401(k) plan...

possibly what you might have read or are thinking of, is that even if both plans are safe harbor, they have to have the same formula as well.

[movedon]

Tom- what did you mean by "you can aggregate a plan with a non related company"?

[Kevin C]

K2retire,

Are you thinking of this?

1.401(k)-1(b)(4)(ii) Aggregation of cash or deferred arrangements within a plan. --Except as otherwise specifically provided in this paragraph (b)(4), all cash or deferred arrangements included in a plan are treated as a single cash or deferred arrangement and a plan must apply a single test under paragraph (b)(1)(ii) of this section with respect to all such arrangements within the plan. Thus, for example, if two groups of employees are eligible for separate cash or deferred arrangements under the same plan, all contributions under both cash or deferred arrangements must be treated as made under a single cash or deferred arrangement subject to a single test, even if they have significantly different features, such as different limits on elective contributions.

"Plan" is defined in the next paragraph.

1.401(k)-1(b)(4)(iii)(A)In general. --For purposes of this section and §§1.401(k)-2 through 1.401(k)-6, the term plan means a plan within the meaning of §1.410(b)-7(a) and (b), after application of the mandatory disaggregation rules of §1.410(b)-7©, and the permissive aggregation rules of §1.410(b)-7(d), as modified by paragraph (b)(4)(v) of this section. Thus, for example, two plans (within the meaning of §1.410(b)-7(b)) that are treated as a single plan pursuant to the permissive aggregation rules of §1.410(b)-7(d) are treated as a single plan for purposes of sections 401(k) and (m).

When you put it all together, you get what Tom says. If you aggregate for coverage, you have to aggregate for discrimination (ADP/ACP).

[Guest Sieve]

If each separate plan within a controlled group independently passes 410(b) coverage (after including all employees as part of the test), then each plan can stand on its own for 401(a)(4) or ADP.

So, if one member of the controlled group has a SH 401(k) plan, and the other has a traditional 401(k) plan, they can stand on their own for all purposes (401(a)(4) & ADP) if, when considering all employees of the group as being employed by one employer, each plan independently passes 410(b).

Normally, if one plan fails to pass 410(b), then you can aggregate all plans of the employer (or controleld group) for purposes of 410(b) coverage, which then requires aggregation of the plans for non-discrimination (401(a)(4) or ADP). But, you cannot aggregate a SH plan & a non-SH plan. As a result, some other approach would be necessary to cause the plan(s) not passing 401(b) to do so.

The univeresal availability rule that I think people are thinking of relates to avaialbility of catch up contributions and also relates to auto enrollments & QACAs.

lippy -- I think Tom meant to say "you can't aggregate a plan with a non related company". But he'll have to speak for himself.

[Tom Poje]

I had a typo, one of many.

my humble apologies.

[K2retire]

I thought you were required to aggregate all plans of a controlled group for coverage. If that is not correct, the rest is not an issue.

[Guest Sieve]

You are only required to consider/aggregate all employes of the members of a controlled group when you test each plan for Section 410(b) coverage--that's different, of course, than aggregating the plans themselves to pass coverage.

[Guest Pennysaver]

we know if you have a controlled group, you have to include all employees for coverage purposes.

if you aggregate for coverage, then you have to aggregate for nondiscrim (ADP testing) as well.

but you can't do that unless both plans use the same testing method - but there is no requirement that all members be safe harbor.

Tom - Even if there is no requirement for members of a controlled group participating in a 401(k) plan to either all be safe harbor or all be non-safe harbor, doesn't the fact that Code Section 401(k)(12)(B)(ii) prohibits a higher rate of safe harbor matching contributions for HCEs than NHCEs effectively result in a requirement that if one member is safe harbor, then all must be? Otherwise, since you look at all of the employees of the controlled group as the denominator for coverage and nondiscrimination testing but look at only the employees of a single member as the numerator when you are not aggregating, if the safe harbor member has HCEs, and the non-safe harbor member(s) don't provide a match to NHCEs, then the HCEs of the safe harbor member are receiving a higher rate of match than the NHCEs of the non-safe harbor member(s), which ruins the safe harbor status. Correct?

[Guest Sieve]

I don't want to speak for Tom, but . . . the higher rate of match issue relates to a SH plan, not to a non-SH plan. Basically, it means that if you have an end-of-yr. alloction condition for the SH match, you cannot utilize it if even one HCE gets the SH match while one NHCE does not receive it (because then the rate of SH match would be higher for an HCE than it is for an NHCE). But, there is no comparable rule that impacts a non-SH plan which independently passes 410(b).

Also, an enhanced SH match percentage cannot increase as deferrals increase (i.e, 100% up to 4% of compensation, 125% from 4-6% of compensation). But this, too, is a SH rule, not a non-SH rule.

[Guest Pennysaver]

I don't want to speak for Tom, but . . . the higher rate of match issue relates to a SH plan, not to a non-SH plan.

But that's my point. I am concerned with the effect on the safe harbor plan. Because the member with the safe harbor matching provisions will be allocating a safe harbor match to its HCEs and NHCEs, and the member without the safe harbor matching provisions (and also without non-safe harbor matching provisions) will NOT be allocating a matching contribution to its HCEs and NHCEs, then the HCEs receiving the safe harbor matching contribution will be receiving a rate of match that is higher than that of the NHCEs who are not receiving safe harbor matching contributions. Since that is forbidden by Code Section 401(k)(12)(B)(ii), the member with the safe harbor matching contribution will have an impermissible safe harbor matching formula and lose its safe harbor status. It looks like this could happen in both permissively aggregated and testing separately situations.

So, it appears that if one member is going to use a safe harbor matching formula, then all the members must do so. Or conversely, if the other members are not utilizing a safe harbor matching formula, then the one member cannot use a safe harbor matching formula, either. Or do I just not get it?

[Guest Sieve]

Using your words, I think you just don't get it--or else I'm not explaining it well enough . . .

The IRC section you cite means that, in the SH plan, no HCE participant can have a SH match that is at a higher rate than the SH match for any NHCE participant. You will not be doing that. Each SH plan participant (i.e., each participant in the SH plan) will receive the same match (or so I assume).

If the SH plan passes 410(b), and if the non-SH plan also passes 410(b), then each plan stands on its own. That a SH HCE participant may have a higher rate of match than a non-SH NHCE participant is therefore immaterial.

To analyze it more fully . . .

• IRC Section 401(k)(12)(A) says that a safe harbor plan (i.e., a plan which will be treated as passing ADP) must meet the requirements of (B).
  
• IRC Section 401(k)(12)(B)(ii) then says that there must not be a higher rate of match "under the arrangement" (i.e., under the SH plan) for an HCE than for an NHCE. It does not say that other plans of the employer which are not SH plans must be considered when determining the rate of match--just rates of match "under the arrangement". And there is no provision which prohibits a higher rate of match as between an HCE and an NHCE in a traditional 401(k) plan (as is clear when you consider that a traditional 401(k) match can be subject to y/s and end-of-year allocation conditions).
  
• The reg (Treas. Reg. Section 1.401(k)-3©(4)) says that the SH matching contribution requirement is not satisfied "if the ratio of matching contributions made on account of an HCE's elective contributions under the cash or deferred arrangement [i.e., under the SH plan] . . is greater than . . . would apply with respect to any eligible NHCE . . . at the same percentage of safe harbor compensation" (emphasis added). (Look, too, at the definitions, where an eligible NHCE is an NHCE who is "an employee . . . eligible to make a [deferral] election under the plan . . ." (Treas. Reg. Section 1.401(k)-6, emphasis added.))
  

[Kevin C]

The match limitation you are referring to is in

1.401(k)-3©(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.

Note that it says "any eligible NHCE". That term is defined in 1.401(k)-6 as "Eligible NHCE. Eligible NHCE means an eligible employee who is not an HCE." In the same section, "eligible employee is defined as :

Eligible employee --(1) General rule. Eligible employee means an employee who is directly or indirectly eligible to make a cash or deferred election under the plan for all or a portion of the plan year. For example, if an employee must perform purely ministerial or mechanical acts (e.g., formal application for participation or consent to payroll withholding) in order to be eligible to make a cash or deferred election for a plan year, the employee is an eligible employee for the plan year without regard to whether the employee performs the acts.

So, when you are comparing the matching contribution rate of HCE's to the rates that would apply to eligible NHCE's, you are only looking at NHCE's who are eligible to defer under the plan. If both plans pass coverage independently, the NHCE's in the other plan are not eligible employees under the SH plan.

[Guest Pennysaver]

Sieve and Kevin C., thank you.

So if I understand both of your explanations correctly, there is no cause for concern when you have safe harbor and non safe harbor plans in a controlled group provided the plans of the controlled group members pass coverage separately.

However, does that mean there IS a concern with respect to the rate of match if in fact the plans are aggregated for coverage purposes, and therefore aggregated for ADP/ACP purposes? Thus, the HCEs and NHCEs of the multiple 401(k) and 401(m) components of the plans would be considered as eligible and benefiting under a single aggregated 401(k) plan and a single aggregeated 401(m) plan?

[Tom Poje]

it took me awhile to find it in writing, but once I found it I haven't forgotten it.according to 1.401(k)-1(b)(4)(iii)(B) last sentence:

Similarly, an employer may not aggregate a plan (within the meaning of 1.410(b)-7(b)) using the ADP safe harbor provisions of section 401(k)(12) and another plan that is using the ADP test of section 401(k)(3).

thus, for better or worse, it appears you could never reach the point of aggregating dis-similar plans. At one time I had thought you could aggregate and not rely on safe harbor, but that would not appear to be the case.

[Guest Pennysaver]

Thanks very much, Tom, and everyone else, as well. I appreciate it!

[Guest M. Martin]

This thread has been very helpful.

I have a question relating to control groups and safe harbor contributions where there are two newly related Companies each with their own plan (both can pass 410(b) and 2010 is the first year following the transition grace period) Company A provides for a basic safe harbor match and Company B a 3% SHNEC. Client has an HCE who has been an employee of Co. A who is going to be doing work for Co. B this year and wants to know if she would be able to participate in both plans?

[Mike Preston]

This thread has been very helpful.

I have a question relating to control groups and safe harbor contributions where there are two newly related Companies each with their own plan (both can pass 410(b) and 2010 is the first year following the transition grace period) Company A provides for a basic safe harbor match and Company B a 3% SHNEC. Client has an HCE who has been an employee of Co. A who is going to be doing work for Co. B this year and wants to know if she would be able to participate in both plans?

Hard for me to imagine on what basis the employee of B wouldn't be able to participate in B's plan.

[Guest M. Martin]

I apologize I phrased the question pretty poorly, since Co. B has the 3% SHNEC it wouldn't matter if the HCE deferred or not. Hopefully this helps:

If the plans continue to pass Coverage can the HCE receive a SH Match from Co. A and the 3% from Co. B without causing the plans to lose their deemed pass on the ADP/ACP testing and/or require additional special testing?

Does a problem occur if the SH contributions are allocated based only on the compensation received from each entity, and as a result, 414(s) is not satisfied since compensation earned from all related entities is considered to have come from a single employer?

Fortunately, the client has asked in advance of any work/compensation being paid from Co. B where other arrangements can be made if necessary. But in the event this had occurred and discovered after the fact, as it often does, I'd like to understand the problems that could be encountered and/or additional testing that might be required.

[rcline46]

Since aggregation of pay, deferrals and match are testing issues for ADP/ACP tests it would appear to be a problem at first blush. However, since a SH plan is exempt from testing, I don't see a problem.

[austin3515]

I too have a hard time finding fault with two plans (both of which satisfy coverage) applying a 414(s) definition of compensation and have that be treated as not satisfying 414(s).

I get where you're going with this but based on the logic I've set forth, I have a hard time believing anyone could find fault.

I was intrigued to learn in an earlier post regarding depositing SH beyond 12 months after the end of the plan year that a SH plan CANNOT apply the ADP test. Those provisions were removed. The ADP requirements in a SH Plan are to be satisfied through the SH contribution. Anything that goes wrong is an operational failure. To apply the ADP test would require a retroactive amendment to plan and would need a VCP submission.

In your case, if you failed coverage, you would correct that failure through a -11(g) amendment and provide QNECS, etc to correct.

Here's the link...

http://benefitslink.com/boards/index.php?showtopic=45280

[BG5150]

So what do we do in this case:

We have a controlled group situation With companies A & B.

Company A is Safe Harbor NEC

Company B is straight 401(k) with ADP testing

They cannot pass coverage independently for 2011 (2010 is okay, I think).

Do I have to make company B Safe Harbor for 2011? Do I have to make SH to A and do ADP testing on combined group?

[rcline46]

Your choices are remove SH for A or add SH for B. I do not think you have any other choice.

However, if you work a targeted QNEC for only A (document must be right and so forth) you might accomplish what you want and it will look like a SH for A.

[PensionPro]

We have a takeover situation where for 2012 Employer A of controlled group had a safe harbor plan, and Employer B of controlled group had a regular plan with ADP/ACP testing. They do not pass coverage separately under RPT or ABT. What are out options if the plans can not be aggregated for testing? Thanks.

[PensionPro]

Anybody wants to take a shot? Thanks.

[Mike Preston]

Which plan(s) fail coverage? Surely one of them passes 410(b). Is there an acquisition in the recent past such that you can use 410(b)-6c? Give some body counts.

If, in the end, the 401(k) doesn't satisfy coverage your choices are to have a non-qualified CODA (doubt you would want this) or to pull some people into the plan that work for A and give them an EPCRS contribution.

[PensionPro]

There was an acquisition in 2010 that created this scenario. Due to personality issues the companies do not want to share information with each other. The plans have different TPAs. After much negotiation the companies are willing to have the different TPAs share information as long as they do not share information with the company itself.

Employer A is not a safe harbor, has a match formula of 100% to 4%, and does not pass 410b in the aggregate (5 HCEs and 12 NHCEs, ratio 28.66%). This is the plan we administer and has the issue. Employer B is safe harbor (basic match) and does pass 410b (3 HCEs and 55 NHCEs, ratio 218.91%).

We do not have the 410b6 transition relief for 2012. Obviously there are design issues and timing issues, which are being discussed separately. Just looking for some ideas before we recommend legal counsel or EPCRS. Thank you!

[Tom Poje]

so you have 67 nhce / 75 total ee = 89.3% or a safe harbor % of 28.25

Plan A is 28.66 which is > 28.25 so if you can increase the avg ben % to 70% you pass.

since there is one and only one avg ben pct test including all ess and all contributions (except catch ups), then either plan can increase NHCEs, though since plan B does not fail it might be increasing plan B is not an option.

how close/far away is the avg ben pct test?

[PensionPro]

Good point, Tom! ABPT is about 47%, so if either plan can make contributions to (some of the 67) NHCEs to get ABPT to 70%, we should be in the clear.

Maybe a large enough contribution requirement will wake them up to the need for better coordinated plan design!

[Mike Preston]

Remember you can run the ABPT on a cross-tested basis, so 47% may already be > 70%.

[Tom Poje]

perhaps better worded, just to make it clear, you can run the ABPT on a cross tested basis without having the plan be required to provide a gateway.

[PensionPro]

Thanks for the reminder%

[Lame Duck]

I have a situation that I've been struggling with and I think some of you may be able to help, since I am not an expert in sahe harbor plans.

I have a client who is a member of a controlled group with about 20 members. The members all maintain separate safe harbor plan and define compensation as total compensation. My client wishes to amend the definition of compensation to exclude bonuses, even though none of the other members will be doing so.

First, can my client do this?

Second, if it can what are the potential risks?

Thanks for any help and guidance you can give me.

[Luke Bailey]

Thanks for explaining all of this so clearly, Tom.