SH Match - calling all, especially Tom Poje

[Blinky the 3-eyed Fish]

Plan provides the standard SH match - 100% match on first 3% and 50% of next 2%. The plan currently has a discretionary match formula that has a last day and 1,000 hours requirement. The plan is top heavy.

The goal is to provide additional matching contributions and not blow the TH exemption or the ADP or ACP test exemptions.

It seems as if the plan could be amended before the end of the plan year to remove the allocation conditions for the discretionary match, to cap the discretionary match at 4% of pay and to only match deferrals up to 6% of pay. As far as I can tell, I just need to spell out the caps and not necessarily the formula. I plan on the discretionary match being 2/3 of first 6%. The end result between the SH match and the discretionary match would be 166 2/3% of the first 3% and 116 2/3 % of the next 2% and 66 2/3% of the next 1%.

Does anyone (Tom Poje) see a problem with this? This is not my forte.

[Guest Sieve]

I'm not Tom, last I looked, but . . .

Don't you also want to match 66-2/3% on an additonal 1% of comp. to take it all the way up to 6% of comp. (i.e., 166-2/3% up to 3%, 116-2/3% on the next 2%, & 66-2/3% on the next 1%)?

[Blinky the 3-eyed Fish]

Yes, I didn't summarize correctly. That is what it's doing. I fixed the summary part.

[Lou S.]

Correct me if I'm wrong here but isn't the discretionary match an "additional employer contribution that is not required on account of the ADP/ACP safe-harbor" and doesn't that blow the Top-heavy exemption?

Is there an exception for the additional discretionary match? I know the formula you aredescribing satisfies the ACP test but I'm not sure it maintains the T-H exemption.

[K2retire]

I agree with Lou that the discretionary match will subject them to top heavy treatment. What I don't recall is if making it a fixed match, rather than discretionary, might solve that problem.

[Tom Poje]

well, Tom is out. hopefully the mean nasty Grinch can lead you astray.

according to my notes, er at least the Code:

Top Heavy (416(g)(4))

The term ‘top-heavy plan’ shall not include a plan which consists solely of –

(i) a cash or deferred arrangement which meets the requirements of section 401(k)(12), [ADP safe harbor] and

(ii) matching contributions with respect to which the requirements of section 401(m)(11) [ACP safe harbor] are met.

if the discretionary match meets the conditions of a safe harbor match, then the plan gets a top heavy free ride (assuming there are not an additional profit sharing or forfeitures of course)

......

I would agree that a 66.6% match on the first 6% deferred is the ideal match because that translates to a max of 4% of comp, thus you meet all the requirements for the safe harbor discretionary match.

The IRS has never addressed the issue of eliminating the discretionary matching conditions during the year, so technically that could be a sticking point. but since the plan already provides a SHMAC for the ADP I doubt it would be a problem. If the plan had provided a SHNEC instead then I might be a little more hesitant. someone might not have deferred if the match had conditions attached. Arguably, someone might have only deferred 5% instead of 6% with the Basic match in place, but since the discretionary match is discretionary there is no guarantee that any additional match would be made, so I don't see how that should really effect how much someone defers.

........

Max (the dog) says Hi to all

Now, as for my boss...

Then my boss grumbled with

his fingers nervously drumming

I must find some way

to keep Christmas from coming.

For tomorrow he knew

those folks he employs

Would wake bright and early

and rush for their toys

They’ll take the day off,

they won’t come to work

They’ll expect to get paid,

what do they take me for – a jerk?

[Blinky the 3-eyed Fish]

Thanks for the confirmation Tom, err.., Grinch.

[Kevin C]

Tom,

The TH exemption using a discretionary match was Q 14 in the 2006 IRS Q&A's from the ASPPA annual conference. The example was a 3% SH that also allowed the discretionary match. The speaker said that allocating a discretionary match would blow the TH exemption. There were some errors in the handout for that question. If you download those Q&A's from the ASPPA, the listed answer is maybe. Has it been addressed since then?

Blinky,

I think the plan year requirements in 1.401(m)-3(f) and 1.401(k)-3(e) will prevent you from doing the amendment for this year. You are attempting to amend during the year to make the discretionary match part of the SH. You are not allowed to change the SH provisions during the year. I would make the change effective 1/1/09.

[Tom Poje]

Kevin:

you make a good point. There are (or maybe I should say) there is at least one IRS agent who feels that the discretionary match would ruin the top-heavy exemption. I don't see that at all, and I know Craig Hoffman disagreed with the opinion as well.

Revenue Ruling 2004-13 (the one dealing with the question if the top-heavy was a year by year basis) simply says

Section 401(m)(11) provides that a defined contribution plan is treated as satisfying

the ACP test for matching contributions if the plan meets the requirements of § 401(k)(12)

and in addition meets certain limitations on the amount and rate of matching contributions

available under the plan

[Blinky the 3-eyed Fish]

Kevin, I looked up your cite and I agree it appears the removal of allocation conditions during the year precludes SH reliance in 2008. You agree Tom?

[Tom Poje]

are you asking "what would I do", or "could you get away with it"?

I personally wouldn't do it. would the IRS press the issue? the question has been raised in a slightly different vein to the IRS "If a plan has a 1 year wait could it be amended during the year to have no wait and still be safe harbor" this was in regards to the SHNEC, so it really has no effect on someone deferring. the IRS hemmed and hawed on the answer, so its hard to say. you would think if you are only making things better it would be ok, but they haven't addressed the issue.

Again, in your particular example, the plan already had a Basic match, so does the discretionary match effect someones deferral level? - and just how would the IRS view it?

arguably, under the notice requirements

(1.401(k)-3(d)(ii)

A. you describe the safe harbor contributions

B. other contributions (this can simply say see the SPD)

since the descretionary match was described under B (most likely) then that would seem to preclude changing things.

but if your notice was vague enough or general enough I suppose you could get away with it so to speak.

[Kevin C]

I think there is more than a slight difference there. Eligibility requirements are not safe harbor provisions. The IRS may want to apply the SH plan year restrictions on amendments to non SH provisions, but that isn't what the regs say. We have announcement 2007-59 saying that amending to add Roth or hardship provisions mid-year is ok. They appear reluctant to say what other non SH changes they think are ok.

The question here is can you amend the SH match during the year to add a discretionary match piece? I think it is pretty clear the regs say you can't.

[dmb]

well, Tom is out. hopefully the mean nasty Grinch can lead you astray.

according to my notes, er at least the Code:

Top Heavy (416(g)(4))

The term ‘top-heavy plan’ shall not include a plan which consists solely of –

(i) a cash or deferred arrangement which meets the requirements of section 401(k)(12), [ADP safe harbor] and

(ii) matching contributions with respect to which the requirements of section 401(m)(11) [ACP safe harbor] are met.

if the discretionary match meets the conditions of a safe harbor match, then the plan gets a top heavy free ride (assuming there are not an additional profit sharing or forfeitures of course)

......

I would agree that a 66.6% match on the first 6% deferred is the ideal match because that translates to a max of 4% of comp, thus you meet all the requirements for the safe harbor discretionary match.

The IRS has never addressed the issue of eliminating the discretionary matching conditions during the year, so technically that could be a sticking point. but since the plan already provides a SHMAC for the ADP I doubt it would be a problem. If the plan had provided a SHNEC instead then I might be a little more hesitant. someone might not have deferred if the match had conditions attached. Arguably, someone might have only deferred 5% instead of 6% with the Basic match in place, but since the discretionary match is discretionary there is no guarantee that any additional match would be made, so I don't see how that should really effect how much someone defers.

I'm still a little confused. i have a plan that is an enhanced match safe harbor 401k with a new comparability profit sharing piece. It sounds like since the employer will be making a profit sharing contribution the non-keys will require a 3% TH minimum allocation regardless of the safe harbor. Is that correct?? Thanks.

[K2retire]

That is correct. Any contribution beyond deferrals and the safe harbor triggers the top heavy minimum requirement.