401(k) Safe Harbor

[Guest ETodd]

Corporation has had a 401(k) safe harbor plan for several years. Each year, each owner has always been paid the maximum annual compensation limit (ie: $230K for 2008) and each owner has always benefited from the maximum annual contribution (ie: $51K for 2008 including $5K catch up).

The corp does not match, but is does contribute a 3% safe harbor.

The 2009 max annual compensation limit is $245K .... but the owners' want to know if they can each get the 2009 $54K max annual contribution ($49K + $5K catch up) if each of their 2009 annual compensation is only $200K.

Am I correct in thinking that they can, as long as the corp is willing to make a 5% PS contribution to each qualifying NHCE ?

I figured the 5%, as follows.

Owner deferral = $16,500 + $5000 = 22,000

Owner 3% safe harbor = $200,000 @ 3%= 6,000

Plug owner PS cont = $200,000 @ 13% = 26,000

Total addition = $54,000

PS cont to NHCE = lesser of 5% ... or... 1/3 of (3% + 13%).

Since 5% is less than 5.5%, then the required PS cont to NHCE must be 5%.

Am I correct, in left field, or in the parking lot ??

Thanks

[K2retire]

You're headed in the right direction. The only remaining unknown is if the 5% for NHCEs will pass the 401(a)(4) testing.

[Guest ETodd]

K2retire, Thanks. I've searched the internet and have been unable to find literature that describes the steps involved in performing the 401(a)(4) testing.

Is it some kind of mathmatical equation or comparison type test .... or do I need special software to perform the 401(a)(4) test ?

By the way, what is the name of the test/requirement that requires the NHCE % to be the "lower of 5% or 1/3 of the HCE %"" ? I thought that maybe it was referred to as the 401(a)(4) test .... but now I realize, based on your response, that the 401(a)(4) test is a separate requirement.

[Bird]

The 401(a)(4) nondiscrimination testing discussed here converts contributions to projected benefits at retirement age and then compares those benefits to prove NHCEs are not being discriminated against. It's complicated to say the least, and software or a pretty well programmed spreadsheet is required.

The 5%/one-third rule is known as the gateway, and as I recall is in the final (final, final?) a4 regs.

One important thing to know is that the plan must permit the disparity in contributions that you are contemplating, and just because the profit sharing contribution is "discretionary" doesn't mean "everybody gets whatever we say they get." Discretionary means that the total contribution amount is determined by the company, but then it is allocated according to a formula - which could say that everyone in the plan gets the same percentage of compensation, or it could have the special provisions allowing 13% for one person or group and 2% for another person or group.

If I can ask, what is your role wrt this plan?

[pmacduff]

I would also note that if each owner as "always benefited from the maximum annual contribution" as noted in the original post, then I think this plan was already likely being checked for 401(a)4 nondiscrimination, or should have been....

Just because they were previously at the maximum compensation limit, doesn't mean the annual additions weren't weighted toward them.

my 2 cents.

[Guest ETodd]

Bird, I'm the corp's tax preparer and business advisor. I'm not a TPA. The corp has used an excellent TPA in the past who did all the testing, but that TPA is associated with a local bank's trust department and the TPA has always insisted that the plan assets be held and managed by the bank.

The plan is now considering moving it's assets to an independent investment brokerage firm (who does not perform TPA services) and decreasing the owners' annual salary to $200K because of current economic conditions.

The corp is currently in the process of trying to locate an independent TPA ... and in the meantime has asked me if each owner can receive benefit of the max contribution if their salary were to drop down to $200K.

I realize now, after reviewing the response messages to my question in BenefitsLink, that I am in over my head. So your response has educated me enough to realize that I must now tell the corp that I cannot answer its question and why I can't answer it.

Thanks, I sure appreciate your thorough and direct response.

[Bird]

It makes better sense now; good luck. And pmacduff is probably correct about the proper language being in the plan already, but the decrease in comp could significantly affect the testing.

[Guest rdemyan]

I've read this thread and have a question on the PS contribution. If the corporation is providing a 3% nonelective Safe Harbor contribution, then this contribution has to be made for each employee that is eligible to participate in the plan. Let's assume that the corp has to make a 5% contribution for NHCEs in order to provide a maximum PS contribution for HCEs (total of $54,000 for 2009 including elective contributions, 3% contributions and PS). However, because this plan has a 3% nonelective Safe Harbor contribution, doesn't this 3% count towards the overall 5% for the NHCEs. If that is the case, then the PS contribution for the NHCEs can be as low as 2% because 3% has already been made under the Safe Harbor nonelective contribution. My understanding also is that MATCHING Safe Harbor contributions (as opposed to the 3% nonelective Safe Harbor contribution) by the employer DO NOT count towards the 5%.

Please let me know if I am misinformed as I'm wanting to change our plan to the 3% nonelective Safe Harbor contribution for the reasons I've cited above.

Thanks.

[Bird]

Yes, the 3% counts towards the 5% so only 2% extra is needed. Matches don't count...matches are for starting fires.

[pmacduff]

Cute bird!!

The way I remember is that any "non-elective" can count toward the minimum, match is considered "elective" as it is based on amounts deferred.