Safe Harbor 401(k)nonelective contribution satisfied in money purchase

[Guest Bill Mulkern]

A client making a nonintegrated 10% contribution to a money purchase plan wants to adopt a safe harbor 401(k). Both plans will be "paired" standardized plans. It is our understanding that the safe harbor 3% nonelective contribution be satisfied in the money purchase plan, but several questions have arisen - Will the current 10% pension contribution satisfy the safe harbor, or must the pension % be raised to 13? Also, participants are required to complete a minimum of 500 hours of service to qualify for a pension contribution, but no such requirement exists for the safe harbor contribution - can this be rectified? Will the minimum funding standard requiring pension contributions be made not later than 8-1/2 months after the end of the plan year also apply to the safe harbor plan?

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[Guest Bill]

The 401(k) plan can qualify for safe harbor via a money purchase plan contribution IF the mp contribution meets all of the requirements, i.e. it must be at least 3% of compensation, must be vested 100% at all times and must be provided for ALL participants, no last day or minimum hours requirement. Also the participant notice must be given timely.

[Guest T Hoffman]

Don't forget that safe harbor matching contributions and safe harbor nonelective contributions must be subject to the withdrawal restricitons of Section 401(k)(2)(B) and 1.401(k)-1(d). This would require substantial changes to most existing money purchase plans before their contributions could be used to satisfy the safeharbor provisions.

[Guest Bob Elgidely]

If the safe harbor nonelective contribution has been provided to the money purchase plan, can the plan sponsor terminate the plan and thereby triggering a distributable event? Alternatively, can the plan sponsor spin the safe harbor nonelective contributions off to the 401(k)/Profit Sharing Plan, terminate the money purchase plan and distribute the account balances attributable to the money purchase plan assets?

Thank you,

Bob Elgidely

[TPApril]

Company currently has a 401(k) plan and x-tested MP plan w/10% to general staff (10-20% to HCE partners).

What would be a reason against making the 401(k) plan a 3% nonelective safe harbor plan and reducing all class rates in the MP plan by 3%? Highest HCE rate is currently 20%. Reason for change is currently no HCE participates in 401(k) plan but this would make catchup available to those over 50. Understood that s/h contribution is fully vested etc.

[jpod]

I guess a more fundamental question is why still 2 plans?

[chc93]

I guess a more fundamental question is why still 2 plans?

We have one employer (only one, all others have merged MPPP into 401k/PS) that keeps his MPPP along with his 401k plan. Reason is that the MPPP contributions are mandatory, whereas a PS contribution is discretionary. Better for employer/employee relations that company is committed to an employer contribution.

[jpod]

MPPP contributions are not mandatory. Can always amend to eliminate with 204(h) notice. You can make profit sharing contributions "mandatory" in sort of the same sense.

[TPApril]

Plan Sponsor understands the ability to stop and/or change MP contribution rate, but they feel in the local business environment that they want to retain the separate plans.

That being said, I don't know why the prior TPA did not present the safe harbor option for the 401(k) plan, or if they did why they didn't proceed with it, so I'm trying to ponder reasons against it before we present it.

[chc93]

MPPP contributions are not mandatory. Can always amend to eliminate with 204(h) notice. You can make profit sharing contributions "mandatory" in sort of the same sense.

Yes, I understand.

Plan Sponsor understands the ability to stop and/or change MP contribution rate, but they feel in the local business environment that they want to retain the separate plans.

That being said, I don't know why the prior TPA did not present the safe harbor option for the 401(k) plan, or if they did why they didn't proceed with it, so I'm trying to ponder reasons against it before we present it.

Company feels that a plan that has a "defined" contribution, as opposed to a "discretionary" contribution, helps, even knowing that the "defined" contribution can be amended at any time. At least the "defined" contribution can be communicated to employees as a company committment that is written into the plan, and not a "discretionary" contribution that the company can change its mind every year. (one company's viewpoint).

[TPApril]

Plan Design challenge here...

All that being said about their desire to maintain the two plans, setting up a 3% safe harbor feature in the 401(k) plan would still be a 'defined' contribution, even if the MP was reduced from 10% to 7%, with a total 'defined' contribution remaining at 10%. Given the ability to take advantage of the catchup feature in the 401(k) plan, I'm still trying to guess why this wasn't done by the prior tpa (who I admire and respect, so skill set was not an issue).

[Mike Preston]

Clients think the darndest things at times.