Safe Harbor 401(k), Top Heavy and uses permitted disparity formula

[katieinny]

A TPA is trying to use a document's 4 step excess integrated allocation formula, but is confused about why a 3% contribution is allocated twice (steps 1 and 2) instead of just once before getting to the integrated part of the formula. If the 3% non-elective safe harbor contribution satisfies top heavy, why are these participants getting 6%? I've looked at Notice 98-52. Section VIII,B says that "safe harbor non-elective contributions may not be taken into account under any plan for purposes of section 401(l) (including the umputation of permitted disparity under section 1.401(a)(4)-7)."

I think that's saying that the 3% non-elective contribution must be allocated without being integrated, which is fine. But that doesn't mean that it can't be used to satisfy the top heavy contribution requirement.

Am I interpreting that section incorrectly, or is there another section in 98-52 that I'm missing? Section VIII,C specifically says that "if a plan allocates to all eligible employees a 3-percent safe harbor nonelective contribution, the plan generally would also satisfy the top-heavy minimum contribution requirement." There's no exception mentioned for integrated plans.

[BG5150]

Does the plan have any other employer contributions other than the SH? Like an additional profit sharing or match or reallocated forfeitures? If not, you should be okay with just the SH contribution--since you get the "free pass" in that situation.

If not, I think all you have to do is give participants employed on the last day of the year, but who entered the plan mid-year, an additional contribution to get them "trued-up" to their full year compensation. Yuu don't have to mess with the integrated profit sharing allocation at all.

[katieinny]

Yes, there is an additional PS contribution -- that's the part that's integrated. I agree that the top heavy rules apply when additional contributions are made, but that doesn't mean that the safe harbor contribution doesn't satisfy the top heavy contribution requirement. I agree that you have to be careful about including a full year's compensation. I'm just trying to figure out why the extra 3% step is in there, which gives everybody 6% instead of 3%.

[K2retire]

The 3% SHNE can't be used in the integration calculation.

[rcline46]

The 4 step process makes sure Top Heavy is covered, but with comp while a participant it does not work, so there is a 5th step later in the document. It is a (bad/difficult) methodology that the IRS requires in a document due to the LRMs.

The other responders are correct in that the 3% Safe Harbor is actually a separate allocation because it cannot be figured into the integrated formula. Have the person use the 'old' method - get excess comp, multiply by proper integration %, subtract that from the $, divide by the total pay, and if the % is equal to or greater than the integration % you are home free. If not, add the excess comp to the total comp, divide the $ by the total and that is your base and excess %. Or let the computer do it.

[Bird]

There are two contributions and two formulas - one is the safe harbor, where everyone gets 3%, and the other is regular profit sharing, with a 4 step allocation. Generally, if you are trying to maximize the benefits of integration, you don't want a 4 step formula, so faulty plan design may be the problem.

A TPA is trying to use a document's 4 step excess integrated allocation formula, but is confused about why a 3% contribution is allocated twice (steps 1 and 2) instead of just once before getting to the integrated part of the formula.

In the 4 step formula, the 3% allocation is not allocated twice - first, everyone gets 3% of total comp, then (2nd step), it's 3% of excess comp, so you get to integration in the second step. Unless you meant the safe harbor was the "first step" but that's not how it should be thought of, IMO.

[katieinny]

Bird: You're right, I was counting the SH contribution as the first step, but I'm wondering why it isn't the first step. As long as that first 3% contribution meets all the safe harbor and top heavy requirements (e.g., no allocation conditions, based on full year's comp.) why doesn't the next step get into the integrated calculation? Instead, the next step (which is really step one) is another 3% contribution across the board, then the step after that gets integrated, just as you said. It boils down to everybody getting 6% up front before integration kicks in.

I follow your logic -- 2 contributions and 2 formulas (SH and PS). So, is it a faulty plan design -- or do I need to adjust to the fact that everyone gets 6% in an integrated, top heavy, safe harbor plan?

[Bird]

It's a faulty plan design. I think what you want is to amend to a 2 step integration:

Allocation 1 - 3% safe harbor

Allocation 2 - integrated PS

Step 1 - integrated by using comp + excess comp

Step 2 - pro rata

[katieinny]

Okay, thanks. Unfortunately, the language is in a prototype basic plan document, so not likely to get changed. At least I know that it's the plan that's at fault and not me.

[K2retire]

Being a prototype does not mean that a 2 step integration formula can't be used. It is one of the choices in the Corbel prototype.

[katieinny]

This prototype (not Corbel's) put the 4 step formula in the basic plan document -- it's no longer a choice in the adoption agreement.