Safe Harbor 401k - a couple questions

[Guest RS Vatalaro]

I just read Notice 98-52 in its entirety and have a few questions.

1) What exactly has to be done to the plan document if a plan sponsor wants to adopt safe harbor provisions at 1/1/2000. Profit sharing plan w/ 401k provision was installed in 1991. I know a notice must be timely delivered to all participants and that the document has to contain the safe harbor provisions prior to 1/1/2000 in order to be effective 1/1/2000. Does an amendment have to be adopted? Is there any model language out there? Or is the participant notice enough? The Notice seems to suggest that the document actually has to be amended and I'm trying to figure out how to do this for a standardized prototype.

2) Does a plan sponsor have to choose to grant either the QNEC or the match and stick to it from year to year? Or can the sponsor calculate both, and use the lowest number from year-to-year? If the plan sponsor is allowed to switch, can the plan document specify that the match is discretionary (yes, we will make sure the formula meets the safe harbor when the match is actually contributed).

3) The Notice continually talks about making match to NHCE's. It also talks about the ACP test being automatically satisfied if the rate of match for HCE's does not exceed the rate of match for NHCE's. However, I am aware that match outside of the safe harbor formula has to be tested under the ACP test and does not automatically satisfy the ACP test. I just want to make sure that if the plan sponsor grants a, for example, 100% match on the first 4% of pay, to both NHCE's and HCE's, that that formula will satisfy the safe harbor. This match satisfies the minimum formula and does not cause 6% of pay to be exceeded. My concern is about giving the HCE's the match.

4) What if a plan sponsor every year gives a 5% of pay 100% immediately vested profit sharing contribution. This would seem to satisfy the 3% QNEC requirement. Does it? Since there are restrictions on the amount of match that can be applied and have the safe harbor requirements be met, is there any restriction on profit sharing contributions (e.g. doubling as QNEC's).

Sorry this is so long. I really appreciate any help anyone can provide. Thanks.

[Guest RS Vatalaro]

I don't normally clutter up the message board w/ "thank you's" - but this one deserves a thanks as you took the time to give me a detailed and extremely helpful answer. Thanks again.

[M R Bernardin]

1. The document needs to be amended, but not until the end of the remedial amendment period (see Rev. Proc. 99-13?). Thus, for the 2000 plan year, the notice to employees will be sufficient to start with, as long as you have the amendment in place by the end of that year (and the prototype you are using should have acceptable language by then). There is no model language I am aware of, although the prototype sponsor may have put something together.

2. Whatever the employer is using to satisfy the safe harbor (whether match or nonelective), they need to commit prior to the beginning of the year, because they have to send out a detailed notice. They could switch from year to year, but the change would be prospective only. I.e., the employer can't tell employees in late 1999 that they are going to do a 3% nonelective for 2000 and then, at the end of 2000, decide to do a match instead. But, they could choose to satisfy the safe harbor by a nonelective and also retain the ability to make a discretionary match (not to satisfy the safe harbor, but just as an add-on), and vice versa.

3. A 100% on the first 4% should satisfy the safe harbor as an acceptable alternative, since at every level of contribution the match is as generous as the standard 100% on first 3% and 50% on next 2, no HCE will get a higher rate of match, and no match is made on comp in excess of 6%. The Notice does not prohibit giving the same match to HCEs and NHCEs.

4. There is no restriction on giving a 5% nonelective instead of 3%. Only the first 3% is needed to get a pass on the ADP test. It's my understanding that the nonelective contribution would be subject to nondiscrimination testing, whether at the 3% or 5% level, but should nevertheless satisfy a design-based safe harbor under 401(a)(4).

[Guest T Hoffman]

As to Q#4, an important difference between QNECs and fully vested profit sharing contributions is that QNECs must be subject to the 401(k) distribution restrictions. The document would need to make the profit sharing contributions subject to theses restrictions in addition to the full vesting.

[Guest RMassa]

In regards to question #4, If an employer offers a nonelective contribution and then decides to add a safe-harbored match in addtiona, the percent of compensation that the employer gives to employees in a nondiscretionary contribution will reduce the amount that you could give as a safe harbored match.

In 98-52 VI.B.4.D example 2, the employer is giving a 3% nonelective contribution to the employees and is matching $.50 on the dollar for the first 6% of comp on deferrals. This passes the ACP safe harbor because matching, in the aggregate, does not exceed 6%. However, example 3 goes one step further and adds an additional match to after-tax contribs of $.50 on the dollar for the first 6% of comp as well. This exceeds the aggregate 6% comp limit because now you are offering a 3% non-elective, and maximum matches of at least 3% of comp on each pre-tax and post-tax dollars.

So, for design purposes, the more non-elective contributions an employer offers as a percentage of compensation, the lower the amount they may offer as an ACP safe harbored match (if they choose to offer both).

[david shipp]

I would respectfully disagree with RMassa.

In example 3, the conclusion states that the example does not satisfy the matching limitations because more than 6% of compensation is matched - elective contributions up to 6% of compensation are matched PLUS up to 6% of voluntary contributions are matched. This results in a possible match on up to 12% of compensation.

Example 4 shows that a 50% fixed match on up to 6% of compensation can be combined with a discretionary match of 50% on up to 6% of compensation (the same 6% of compensation) and still satisfy the ACP safe harbor when combined with a 3% nonelective ADP safe harbor contribution. (This design satisfies both the safe harbor requirement that matched compensation be limited to 6% and the requirement that any discretionary match be limited in amount to 4% of compensation.)

These examples should show that the nonelective contribution doesn't reduce the permissible match and that the same compensation can be the subject of multiple matching formulas.