Non-elective Safe Harbor

[Dazednconfused]

Hi,

I have a plan that wants to elect non-elective safe harbor that is 7%, is this permissible? Is there a percentage limit that they can elect?

Thanks!

Jason

[Kevin C]

Yes, 7% is allowed. You do not want to set the % so high that you might have a problem with the deduction limit.

I usually pair a 3% SH with a PS contribution if they want to contribute more than 3% for everyone. That way, part of the employer contribution can be subject to a vesting schedule.

[401king]

I thought 6% was the maximum %-of-compensation for any type of safe-harbor contribution (match or PS).

Is that incorrect? Does it only apply to the SH Match formula?

[Kevin C]

You are thinking of the limits on the SH match in

1.401(m)-3(d)(3) Limit on matching contributions. --A plan that provides for matching contributions satisfies the requirements of this section only if --

(i) Matching contributions are not made with respect to elective deferrals or employee contributions that exceed 6% of the employee's safe harbor compensation (within the meaning of §1.401(k)-3(b)(2)); and

(ii) Matching contributions that are discretionary do not exceed 4% of the employee's safe harbor compensation.

But, note it does not limit the match to 6% of pay. It limits the deferrals that can be matched to 6% of pay.

The non-elective SH contribution rules are in

1.401(k)-3(b) Safe harbor nonelective contribution requirement

(1) General rule. --The safe harbor nonelective contribution requirement of this paragraph is satisfied if, under the terms of the plan, the employer is required to make a qualified nonelective contribution on behalf of each eligible NHCE equal to at least 3% of the employee's safe harbor compensation.

(2) Safe harbor compensation defined. --For purposes of this section, safe harbor compensation means compensation as defined in §1.401(k)-6 (which incorporates the definition of compensation in §1.414(s)-1); provided, however, that the rule in the last sentence of §1.414(s)-1(d)(2)(iii) (which generally permits a definition of compensation to exclude all compensation in excess of a specified dollar amount) does not apply in determining the safe harbor compensation of NHCEs. Thus, for example, the plan may limit the period used to determine safe harbor compensation to the eligible employee's period of participation.

[401king]

Thanks, Kevin. That reference point will come in very handy in the future, I predict.

[Dazednconfused]

Hi,

Thanks for the assistance! Another question, which I don't think can be done, but I will throw it out there, can you have a group of participants receiving 7% and then a group receiving 6% safe harbor non electivce?

I don't think you can and I woul agree with you Kevin a plan is better of to do the 3% then 4 % PS but clients are clients very demanding....

Side note, so a safe harbor match contribution can actually be 6% of compensation... I know the other match amounts are limited to the 4%.

Thanks again!

Jason

[Guest Sieve]

You could have varied SH nonelective contributions to different groups, but the groups would have to pass 401(a)(4) benefits-rights-and-features non-discrimination testing and the general 401(a)(4) non-discriminatin rules. But the rule for SH matches--that if any HCE receives a higher rate of match it will violate the SH rules--does not similarly apply to SH non-electives. (Treas. Reg. Sections 1.401(k)-3©(4) & -3©(7), Ex. 5.)

Here are some rules you may have confused (& one of which Kevin referred to):

• A SH match is not limited to 4% of compensation. An additional match which is intended to pass the ACP test cannot exceed 4 % of compensation if it is a discretionary match.
  
• But a match, in order to pass ACP in a SH plan, cannot be calculated on SH compensation in excess of 6% (but it could be 200% of comp up to 6% of comp, as long as it is NOT a discretionary match).