3% Safe Harbor 401 K - Cross Testing

[Guest rdemyan]

We have a 401K plan with a 3% non-elective Safe Harbor contribution. I know that this 3% will count towards determing the contribution amounts for cross testing. So, in a simple case, if a 5% total allocation rate for NHCEs is required to meet the gateway, the 3% match will count because the plan has a 3% non-elective Safe Harbor as opposed to a matching Safe Harbor. So we would have to provide, in this case, a 2% profit sharing allocation.

But 3% is the minimum contribution. What if our plan contributes 4%? In the simple case above would this mean that we would only need to provide a 1% profit sharing allocation to NHCEs. The software we currently use to cross test, uses a fixed 3% Safe Harbor contribution, so I can't test the effects of increasing it to 4%. Perhaps, 3% is all that can be used for cross testing. I don't know, hence this question. Thanks.

[K2retire]

If your document calls for a 3% SHNE, that is what you must contribute -- not more, not less.

Any profit sharing that you choose to contribute beyond that will need to follow the terms of the document as well. Usually it is a discretionary amount. If yours is, as you say, a 3% minimum then it sounds like the total will end up being 6%. Or are you referring to some other minimum?

As for the software, the problem may be that you are trying to put it all in the SHNE money type rather than splitting it between that fixed contribution and the discretionary profit sharing.

[Guest rdemyan]

My understanding is that the 3% is a minimum for a non-elective Safe Harbor contribution. More can be contributed. The 4% would apply to everyone that is an eligible participant of the plan.

[Tom Poje]

the document could read the safe harbor is "at least 3% of compensation", in which case the safe harbor could be more than 3%.

however, remember, a safe harbor is still a form of QNEC, and therefore you would not be able to impute disparity on any such animal.

it is probably better to provide any additional amount in the form of a profit sharing contribution.

[Jim Chad]

I am reading a different question. If your document says the safe harbor contribution is 4% the whole 4% would be used in the test. As Tom mentioned you cannot impute disparity on this, but otherwise testing is the same for all non-elective contributions. This is true whether the no-elective is safe harbor or discretionary. (This is for 401(a) testing: not ADP or ACP)

[AndyH]

Are there really documents that would allow a 4% safe harbor nonelective contribution?

[Laura Harrington]

Are there really documents that would allow a 4% safe harbor nonelective contribution?

Yes, I've seen a lot of prototype and volume submitter documents that have a blank line for filling in the safe harbor noneletive percentage with a note that it must be at least 3%.

[BG5150]

But, I would think the notice that goes tot he participants before the plan year starts would say the exact percentage to be given. Even if the document states "at least 3%," the notice would have to say "3%" or "4%" or whatever the ER determined would be the SH for that year. Or, can the notice be ambiguous in that regard?

And I didn't understand this:

...the 3% match will count because the plan has a 3% non-elective Safe Harbor as opposed to a matching Safe Harbor

(emphasis mine)

[Laura Harrington]

But, I would think the notice that goes tot he participants before the plan year starts would say the exact percentage to be given. Even if the document states "at least 3%," the notice would have to say "3%" or "4%" or whatever the ER determined would be the SH for that year. Or, can the notice be ambiguous in that regard?

And I didn't understand this:

...the 3% match will count because the plan has a 3% non-elective Safe Harbor as opposed to a matching Safe Harbor

(emphasis mine)

The notice has to be exact. The document cannot not let the client decide each year how much to put in for safe harbor nonelective. Ther percentage has to be stated in the plan document and in the notice.

The note I referred to in the documents I have seen means that you cannot put a number in the blank that is less than 3%.

[Tom Poje]

from the 2007 ASPPA conference

Q17) Safe Harbor 401(k): For the safe harbor nonelective contribution, does the document or notice have to specify the exact percentage or can it simply say “at least 3%,” giving the employer to contribute a larger contribution if it so desires?

A: The safe harbor matching contribution formula must reflect the exact percentage. The nonelective contribution formula may be expressed as “at least 3%.”