Safe Harbor 3% Nonelective with Additional Match

[Guest allisonperry]

An employer has an ADP safe harbor plan using the 3% safe harbor nonelective contribution. The plan also includes a matching contribution and satisfies the ACP safe harbor with the same 3% nonelective contribution. The employer wants to amend the plan mid-year to change the matching percentage. Can this be done without threatening the safe harbor status of the plan? It seems clear from Reg. sec. 1.401(m)-3 that a safe harbor matching contribution can only be eliminated mid-year if notice is given, an amendment is made, and ADP/ACP testing is performed for the entire plan year. However, the matching contribution that the employer wants to change is not a safe harbor match (since the plan uses the safe harbor nonelective contribution instead). It is simply an additional match under the plan. Further, if the change to the match can be made without taking the plan out of safe harbor status, must the employer provide supplemental notice to participants considering the safe harbor notice given prior to the beginning of the plan year explained what the matching contribution percentage would be for the year?

[Tom Poje]

A safe harbor plan never has to say how much of a discretionary match will be made - simply that there exists the possibility of such a match.

so the question would be, do you pass safe harbor ACP if the discretionary match is reduced during the year.

I would say no, thus you will have to pass the ACP test. My reason being that you have created a scenario in which the match was at one rate at one point during the year, and at another rate at a different period. (Thus, the HCE could abuse it by having a discretionary match at 66% up to 6% deferred - and the HCE socks it away early. then the formula is amended to did-del-lee squat and the NHCEs are left out in the cold.)

[Guest allisonperry]

A safe harbor plan never has to say how much of a discretionary match will be made - simply that there exists the possibility of such a match.

so the question would be, do you pass safe harbor ACP if the discretionary match is reduced during the year.

I would say no, thus you will have to pass the ACP test. My reason being that you have created a scenario in which the match was at one rate at one point during the year, and at another rate at a different period. (Thus, the HCE could abuse it by having a discretionary match at 66% up to 6% deferred - and the HCE socks it away early. then the formula is amended to did-del-lee squat and the NHCEs are left out in the cold.)

Thank you for your response. The match is actually not discretionary--it is a fixed percentage and was explained as a fixed percentage in the safe harbor notice (50% of a participant’s deferral contributions made during the plan year, up to and including 6% of such participant’s compensation for the plan year). Are you saying that because HCEs may be better positioned to fully take advantage of the higher match percentage at the beginning of the year by front-loading their deferrals (whereas a lower-paid employee may need to spread out his/her deferrals over the entire plan year) that changing the match formula mid-year would take the plan out of safe harbor status? Doesn't the 3% safe harbor nondiscretionary contribution satisfy the safe harbor on its own? I see that perhaps this would not pass the "smell test," but what is there to rely on in terms of IRS guidance? Do you read the regulations to require ADP/ACP testing when a mid-year change is made to any matching contribution under the plan, rather than simply with respect to a safe harbor matching contribution?

[Tom Poje]

if the plan is providing the 3% shnec then the ADP is satisfied.

but the shnec has nothing to do with the ACP test at all.

If there is no match, then there is nothing to worry about because there is no ACP to worry about it.

if the plan stated it would provide a match and then switches (reduces or eliminates) then the regs say the ADP test must be satisfied. interesting, it says nothing about satisfying the acp test! but I think that goes with the concept that normally even the safe harbor match (disgregarding a discretionary match) is tested under ADP and it 'may' be tested under ACP if you want (excluding up to 4% of the match as desired)

you have also botched the top heavy free, though I wouldnt expect that to be a problem unless the shnec was being provided on a date of participation basis.

(my initial response assumed the match was discretionary and I would still hold hold that changing /reducing would fail the issue of the 'rate of match' being different - almost like aggregating 2 plans with different match formulas)

[Guest allisonperry]

if the plan is providing the 3% shnec then the ADP is satisfied.

but the shnec has nothing to do with the ACP test at all.

If there is no match, then there is nothing to worry about because there is no ACP to worry about it.

if the plan stated it would provide a match and then switches (reduces or eliminates) then the regs say the ADP test must be satisfied. interesting, it says nothing about satisfying the acp test! but I think that goes with the concept that normally even the safe harbor match (disgregarding a discretionary match) is tested under ADP and it 'may' be tested under ACP if you want (excluding up to 4% of the match as desired)

you have also botched the top heavy free, though I wouldnt expect that to be a problem unless the shnec was being provided on a date of participation basis.

(my initial response assumed the match was discretionary and I would still hold hold that changing /reducing would fail the issue of the 'rate of match' being different - almost like aggregating 2 plans with different match formulas)

I don't understand what you mean when you say that the SHNEC has nothing to do with the ACP test. In order to satisfy the ACP safe harbor, the plan must satisfy the ADP safe harbor, and this plan does that by providing a SHNEC. (See Reg. 1.401(m)-3(b).) The plan does say that it will satisfy the ACP safe harbor. The plan stated it would provide a match (but not a safe harbor match). But again, the regs do not seem to clearly require ADP/ACP testing if a match which is not a safe harbor match is reduced mid-year. Specifically, Reg. 1.401(k)-3(g)(1)(iv) provides that the ADP test must be satisfied if the plan is amended to reduce or suspend safe harbor matching contributions on future elective deferrals and Reg. 1.401(m)-3(h)(1)(iv) provides that the ACP test must be satisfied if the plan is amended to reduce or suspend safe harbor matching contributions on future elective deferrals.

[Guest allisonperry]

(my initial response assumed the match was discretionary and I would still hold hold that changing /reducing would fail the issue of the 'rate of match' being different - almost like aggregating 2 plans with different match formulas)

Also, which requirement of the safe harbor regs would be violated if the 'rate of match" is different? In other words, to which safe harbor requirement are you referring? when you say it would fail the issue of the 'rate of match' being different? Thanks!

[Tom Poje]

the concept of 'rate of match' is found in the Code (not the regs)- 401(k)(12)(B)(ii)

when I say that the SHNEC has nothing to do with the ACP test I mean that the SHNEC is not used in the ACP test at all (unlike the safe harbor match (provided it doesn't exceed certain limits) which may be used in the ACP test.) conceivably you could have a plan that passes ADP safe harbor and not ACP safe harbor, but you could never have a plan that passes ACP safe harbor and not ADP safe harbor. you could have a plan that provides a SHNEC only. there is no ACP test to pass as there is no match, so there is no ACP safe harbor to worry about. my apologies if that statement was confusing.