safe harbor 3% non-elective 401(k) deduction limits

[Guest Mike Kimball]

If 1999 eligible payroll is 450,000 and deferrals are 50,000, the 15% deduction limit is 60,000 (15% of 400,000). However, the safe harbor 3% non-elective contribution is 13,500 (3% of 450,000). Is the deduction limit 60,000 or 63,500? I know there is no guidance on deductions for safe harbor plans yet (Notice 98-52 is all). I think a good argument can be made for the extra 3,500 being deductible since it is "required" to meet the safe harbor requirements, much like a money purchase contribution is required. Any thoughts????

[LCARUSI]

I think it's $60,000. I'm aware of no basis to treat a safe harbor contribution differently than any other type of company contribution for purposes of 404.

[Guest nellans]

The $60,000 limit is the only one applicable. The top-heavy status affects only the method of allocating the contribution, not the deductible limit.

[Guest Mike Kimball]

I know that if you look at current guidance, that 60,000 is the correct answer. However, the safe harbor contribution is a required contribution as of Jan 1, assuming client has given proper notice to employees and they can't get out of it. The employer also can't control the level of deferrals in a safe harbor plan especially since the ADP is not an issue. If, in my example, the employer only makes a 10,000 non-elective contribution instead of the 13,500 safe harbor requirement, is the plan a safe harbor plan and does ADP test have to be run? This will result in significant failure of the ADP test because the HCEs have all put in 10,000, regardless of their compensation, i.e. could be 10-15% of compensation. Just some more complications. What would you do???

[Lynn Campbell]

Even though this is a safe harbor plan, you need to check the deferral levels to make sure that the total contributions do not exceed the 404 limit. At this point, can you go to the HCEs and have them reduce their deferrals for 12/99 enough to meet 404? Or can you have the HCEs take more compensation in 1999 and not defer from the additional compensation? I think the $13,500 Safe Harbor contribution is required no matter what.

[AndyH]

I agree with all the responses. I think that failure to pay the full safe harbor amount results in plan disqualification. Any amount above the deductible limit is probably subject to the 10% penalty tax.

[thepensionmaven]

I strongly agree with the above. The 15% limit applies to all contributions to a profit sharing plan-deferral, match, and profit sharing. The safe harbor election is treated, I believe, just as a profit sharing contribution is, except that it must be made in order to get out of the ADP testing.

[Guest crosseyedtester]

Just wondering if there has been any update to this issue. This thread seems to answer my question on a plan year ending 10/31/02 in which 401(k) contributions plus Safe Harbor Match (4%) exceeds the 15% deductible limit (Gross Comp less 401(k)). The plan must make the full Safe Harbor Match to avoid running the ADP test which it would fail, but the amount of match which exceeds the 15% limit would not be deductible.

Thank you.

[Tom Poje]

If I recall, there is an option to deduct contributions in the year made rather than for the year made for- thus if made after plan year end you could deduct in that plan year and take advantage of the fact the deduction limit has changed.