Safe Harbor Plan Can you have one with after tax matching contribution

[Guest Kelly McCarthy]

We would like to put in a safe harbor plan effective January 1, 2000. We currently have a dollar-for-dollar match of 4%, we allow immediate vesting, and we have both an after-tax and before-tax component for saving. We were told by legal counsel that the IRS has not make it clear that you can have a safe harbor plan with after-tax employee contributions (with employer match against these contributions). Is it correct that we cannot implement a safe harbor plan due to our matching after-tax contributions (as well as before-tax contributions).

[MWeddell]

First a couple of warnings before trying to answer your question. 1) Your legal counsel may know more about your situation than what you've disclosed to the BenefitsLink readership, so be cautious before you disregard what he or she says. 2) There are a lot of technical reasons why a contribution may not be a safe harbor contribution, but I'm assuming that you've looked at the situation carefully and that only the match on the after-tax contributions is a possible obstacle. 3) The IRS rules on safe harbor contributions right now are in Notice 98-52. The IRS is collecting comments on it and some changes will likely be made when the guidance is issued in the form of proposed regulations. Hence, in a very broad sense, all of the safe harbor rules are unclear because the IRS doesn't consider itself done with this project.

All that being said, I'm inclined to disagree with your legal counsel. Just to clarify, I'm assuming that your match is dollar-for-dollar on the first 4% of pay deferred, regardless of whether it is contributed as pre-tax or after-tax dollars. Section VI(B)(3) of Notice 98-52 says that that match formula is fine. The rate of match satisfies the Notice's requirement and the fact that the match is made on pre-tax or post-tax dollars is not a problem.

If instead your plan's match formula is 100% of the first 4% of pre-tax contributions AND 100% of the first 4% of after-tax contributions (so that an employee can earn 8% of pay as a match by contributing 4% pre-tax and 4% after-tax), then that's not an ACP safe harbor contribution. Section VI(D)(Ex. 4) of Notice 98-52.

Note that if the match formula does satisfy the safe harbor rules for ADP/ACP testing, you'll still have to perform ACP testing on the after-tax contributions themselves. This may have been what your legal counsel was referring to. Note that sometimes testing only the after-tax contributions can yield worse test results than testing both the match and after-tax contributions together.

I know, it's a long response, but it was a complicated question. Good luck.

[M R Bernardin]

For purposes of satisfying the ADP safe harbor (unlike the ACP safe harbor), “rate of match” means the ratio of matching contributions to ELECTIVE contributions. If your match formula matches any combination of elective contributions or employee after-tax contributions up to 4% of pay, it is possible that it might not satisfy the ADP Safe Harbor because a HCE could conceivably receive a higher rate of match than a NHCE. For example, if an HCE contributes 2% on a pre-tax basis and 2% on an after-tax basis, his "rate of match" (looking solely at his elective deferrals) would be 200%. "Rate of match" is defined differently for purposes of the ACP safe harbor, so your formula would probably satisfy the ACP safe harbor if it first satisfies the ACP safe harbor.

[MWeddell]

I admit that the point raised by M R Bernardin looks right to me as well.

The key sentence is in Section V(B)(1)(B) of Notice 98-52. As shown by the last of the examples in Section V of the Notice, I believe this provision is aimed at a different problem and the most likely interpretation is that matching 100% of the first 4% of pay contributed on a pre-tax or after-tax basis is an ADP safe harbor contribution. However, the language is ambigious. Your legal counsel said it is not clear and M R Bernardin wrote that it is possible it might not satisfy the ADP safe harbor and I agree with those views.

Thanks for the correction.

[This message has been edited by MWeddell (edited 06-17-99).]

[Guest ndt123]

We looked at this issue when the notice was released, and our outside counsel checked with the primairy drafter of the notice.

He told us we were reading to much into it. Regardless, I agree that the pharsing can lead to a problem.

[Guest ESOPwizard]

<

HCE could conceivably receive a higher rate of match than a NHCE. For

example, if an HCE contributes 2% on a pre-tax basis and 2% on an

after-tax basis, his "rate of match" (looking solely at his elective

deferrals) would be 200%.>>

I'm skeptical whether this is a real problem. Nevertheless, if you are concerned and if having a safe harbor plan is important, why not amend the plan to not let HCEs make after-tax contributions?