Safe Harbor Match Formula

[WesleyT]

The plan sponsor currently provides an enhanced Safe Harbor Match formula of 100% of the first 6% of compensation. They want to cut back to match only 5% instead of 6%. If I follow my guidelines set forth in Treas Reg § 1.401(k)-3(g) and change the match prospectively, do I have to do ADP/ACP testing? My new formula still satisfies the safe harbor rules. But the regs seem to suggest that any reduction would invoke ADP/ACP testing for the year.

Thanks!

[Lou S.]

My understanding is that reduction mid-year subjects you to testing. If the client changed for 2009 before notices were given out and said it would be 5% for 2009, you would be OK.

You'll also be OK for 2010 if you keep this formula but even though you still have a more generous than required SH match you lose the SH exemption. It doesn't seem fair but I'm 99% sure that's how the rule works.

[Tom Poje]

the rules require that no HCE may receive at a higher rate than an NHCE. suppose an HCE deferred the max the first month so he received the 6%. now you cut back to 5%. its a no go. when viewed over the whole year, the rate of match would be different.

[Kevin C]

An ADP safe harbor plan is not allowed to amend the safe harbor provisions during the year. 1.401(k)-3(e)(1). The rules for permissible reduction or suspension of a SH match in 1.401(k)-3(g) require the plan to be subject to ADP/ACP testing for the entire year. There are similar rules in the 401(m) regs.

As you suspected, the regs say that the formula change they want would subject the plan to ADP/ACP testing for the entire year.