401k SH non-elective contribution

[J Simmons]

If a 401k safe harbor plan calls for 3%-of-pay, non-elective employer contribution and employer also makes non-matching, profit sharing contributions, would those that receive the 401k safe harbor non-elective 3% but no part of the profit sharing contributions be considered as 'benefiting' for purposes of minimum coverage of non-matching employer contributions?

[John Feldt ERPA CPC QPA]

Yes.

410(b) needs to pass for deferrals (based on eligibility to defer),

410(b) needs to pass for match (based on the ability to get a match if the election to defer had been made),

and

410(b) needs to pass for the nonelective. You can provide differing names for the various nonelectives, but it's all one batch (Employer nonelective).

[Tom Poje]

while true all are benefiting for Coverage, your question implies people will benefit at different rates for the non-elective portion - which means nondiscrim testing, possible gateway issues.

[ERISAnut]

The rule being addressed here is not one of coverage (i.e. being considered as covered for 5500 purposes) but instead one of non-discrimination. Each formula, irrespective of any and all other formulas, must pass 410(b).

So, in your question, if a person who has received a SHNEC is excluded from an Employer Nonelective contribution for whatever reason, that is fine as long as the Employer Nonelective Contribution passes 410(b) irrespective of any other allocations. This may be done without cross-testing; and would therefore make the gateway null and void.

You will typically run into this when there is a Safe Harbor 401(k) will immediate eligibility and everyone receives the SHNEC; while the profit sharing component of the plan has a 21 & 1 (or even a 2 year of service) requirement.

[J Simmons]

Thank you, J4KFBC, Tom Poje and ERISAnut!

[rlb64]

This topic has come up in our office and so I'd like to reopen this discussion even though it's almost a year old.

The ERISA outline book (older version) has a discussion on this topic under multiple formulas satisfying safe harbor nonelective contribution, referring to reg 1.401(a)(4)-2(b)(vi). Sal specifically describes the safe harbor 3% as a nonelective contribution the same as any other type of non-elective contribution and thus must be aggregated for 410(b) and 401(a)(4). It also suggests that if there is a condition on the profit sharing that causes one to receive SH and not PS, the multiple formulas do not satisfy the safe harbor for multiple formulas and must be general tested.

I can understand ERISAnut's comment but I believe it should be caveated by stating the profit sharing allocation must be a straight % of pay. That is, I can see that if a plan has a straight % of pay profit sharing formula, running 410(b) on the profit sharing only has the same effect as running 401(a)(4) rate group testing on an allocation basis based on combined PS and SH allocations.

The question is: is there any automatic comfort in passing 401(a)(4) if the profit sharing formula is a normal 5.7% integrated formula. Would imputed disparity allow us to have this comfort without running any tests? Tom suggests a safe harbor PS formula with an annual condition can possibly even force us into cross testing - can we come up with a small example that would demonstrate this?

[Tom Poje]

this concept applies if you are using a 3% safe harbor, or for that matter some people received a 3% top heavy.

Suppose the group that received only 3% consists of less than 30% of the NHCEs.

assume they received 0%.

if you were test on an allocation basis (not accrual basis) then at least 70% have received comparable to the HCEs. even if the plan was integrated, because if you impute disparity the E-BARs on an allocation basis will be equal. (this assumes the plan is not a class allocation)

by the way, 1.401(a)(4)-2(b)(4)(vi)(D)(3) even talk about treating top-heavy only people as includable and not benefiting and if you pass 410(b) you are ok.

[rlb64]

Ok, this makes sense. So, in summary, a plan may provide for safe harbor 3% and a safe harbor profit sharing allocation with an annual condition (such as 1000 hours of service during the plan year and employment on last day) will always satsify 401(a)(4) if the profit sharing allocation without regard to the safe harbor passes 410(b) ratio test or 401a4 average benefits test.

If these fail, the plan is forced to run cross testing.

Did I say this correctly?