Tiered Safe Harbor Match

[Guest Grumpy456]

A client wishes to satisfy the ADP and ACP safe harbors so that all of the HCEs may max out their deferrals (and any match is OK too).

The client wants to use a multi-tiered matching in order to satisfy the "safe harbor contribution requirement". Here's how the match would work:

Under the first tier, all eligible participants (NHCEs and HCEs) receive the "basic match", i.e., $1 for $1 on the first 3% of pay deferred plus $.50 for each $1 deferred on the next 2% of pay. Nothing strange or out of the ordinary with that. It will also satisfy the ACP safe harbor rules.

Under the other tiers (which apply only to NHCEs), the employer will designate participant-by-participant who gets what so that, for example, Jim may get an additional match of 300% of every dollar deferred in excess of 5% and Jerry may get 600% of every dollar deferred in excess of 5% and so on. There would likely be 4 or 5 participants (again, all and only NHCEs) that would receive extraordinary matches in addition to the "basic match". No HCE would receive a match greater than the basic match described in the previous paragraph.

The client's attorneys says no problem since only NHCEs will receive the "enhanced match".

The client is thinking that it can use the safe harbor to benefit certain HCEs by making bonuses and letting the HCEs defer some or all of the bonuses (up to the 402(g) limit, of course). At the same time, the client can benefit some of its "key" employees (I don't mean that in the technical sense) who are NHCEs (many on the verge of being HCEs through pay) by making extraordinary matches that are not counted as income, thus pushing their pay over the HCE pay threshold.

Any comments about whether such a design satisfies the ADP and ACP safe harbors?

[K2retire]

It is only an ACP safe harbor if your discretionary match is limited to no more than 4% of compensation and considers no more than 6% of pay in deferrals to be matched.

[Guest Grumpy456]

So do you think it qualifies as an ADP safe harbor at least?

The sentence in the regulations that worries me is the last sentence of T.R. Sec. 1.401(k)-3©(3) which reads, "n addition, under an enhanced matching formula, the ratio of matching contributions on behalf of an employee under the plan for a plan year to the employee's elective contributions may not increase as the amount of an employee's elective contributions increases." While the intent of that sentence is that since HCEs would more likley than NHCEs benefit from larger matchs at higher deferral levels, if the plan specifically makes any match over and above the "basic match" available only to NHCEs, what's the problem other than that that sentence used the term "employee" instead of "HCE". I don't know how the IRS interprets that sentence.

[Bird]

I think if you provide the basic match as described, it will satisfy the ADP safe harbor. And then if you have the enhanced match for NHCEs only, you shouldn't have a problem satisfying the ACP test, so it's probably ok. But I'd be more concerned about document issues - are you trying to fit this into a pre-approved document, and does it allow for that discretion, or hard-coding the different match by participant? Personally, I think I'd be more inclined to do what they're trying to accomplish with a discretionary (PS) feature using allocation groups. Why screw around with a nutty match when you can just specify exactly who gets what?

[Guest Grumpy456]

Good point!