Eligible Comp for safe harbor 401(k)/Money Purchase Plan combination

[Guest Effie Clark]

I have a client with a 401(k) and MP plan combo. They allow deferrals ASAP but have a one year wait for match and MP contributions. Client wants to do the 3% NEC to the MP plan. All contributions in both plans are 100% vested immediately with no last day or hours requirements. The client wants all employees to get the maximum 25%/$30,000 every year between the two plans. My questions are -

He wants to use comp from DOP for the MP and match contributions but I don't think this is correct if someone is already in for the deferral portion and will be using a full year of comp for the deferrals but DOP comp for the 3% NEC, remaining 7% of MP and matching contributions. (Besides, I don't think there is a software system out there that will allow different comp for ADP and ACP testing, is there?)

Also, if everyone can defer ASAP, does that mean I have to put in the 3% NEC for those who have not satisfied eligibility in the MP plan in order to have a safe harbor on the ADP side for 1999?

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EAC

[MWeddell]

Just to clarify a couple things, it sounds like the plan design aims to give employees the chance to hit the 25% / $30,000 415© limit if the employee contributes 15% to the 401(k) plan. In practice, employee deferrals will vary so not everyone will reach 25% of pay in total contributions. Also, let's clarify that we've got two plans here because the money purchase plan can't include a 401(k) arrangement.

Yes, you may use compensation from date of participation (including a one-year of eligibility service requirement) for any employer matching or nonmatching contributions but use compensation from date of hire or whatever earlier eligibility date you establish for the elective deferrals. If your testing software doesn't accommodate this, then run the (k) test separate from the (m) test and manually combine them to see if the multiple use limit passes.

Of course, you won't need testing software (assuming there's no employee after-tax software) for 401(k) / 401(m) testing because it sounds like you'll design the plan to meet the safe harbor rules. Section VIII(H) of Notice 98-52 lets you view the portion of the plan benefiting employees with less than one year of service separately, which means the 3% nonelective safe harbor contribution doesn't need to be allocated to those with less than one year of service.

[Guest Effie Clark]

Thanks for the response. I was making myself crazy reading 98-52 over and over again. And yes, this is two separate plans, one 401(k) and one MP.

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EAC

[Ervin Barham]

MWeddell is right about the safe harbor contribution. However, if the plans are top heavy, then you may have to make a 3% contribution for those who are deferring who are not eligible for a normal contribution. The top heavy minimum would be based on the full year comp.

[Guest Effie Clark]

Fortunately, these plans are not top heavy so that is not a problem at the present time. (But who knows what the future holds!)