Safe Harbor Compensation Question

[Guest shaul]

Treas. Reg. § 1.401(k)-3©(6)(iii) requires that each NHCE in a safe harbor plan be allowed to defer at least the amount required to receive the maximum amount of matching contributions available under the plan. How does this rule apply where the definition of compensation from which deferrals are drawn is less broad than a definition of “Safe Harbor Compensation” that includes post-severance amounts?

Specifically, if a plan defines deferral compensation to exclude all post-severance amounts, but defines “Safe Harbor Compensation” to include all post-severance “regular” compensation, is the above-described requirement potentially violated? For example, assume a participant terminates on January 5, having received a $2,000 paycheck while still actively employed. He receives a post-severance paycheck on January 15 of $60,000 (as a "regular" bonus payment). The plan matches all deferrals up to 4% of Safe Harbor Compensation, and determines matches on a plan year basis (not a payroll-by-payroll basis). If he defers the full $2,000 he received on January 5, that is still less than 4% x $2,000 + $60,000 (i.e., is still less than 4% of Safe Harbor Compensation). Does this shortfall lead to a violation of Treas. Reg. § 1.401(k)-3©(6)(iii)?

Conversely, is the rule violated if a plan recognizes pre-participation compensation as Safe Harbor Compensation, in the case of a participant who first meets the eligibility requirements and begins participating very late in the plan year (i.e., because he cannot at that point defer 4% of the Safe Harbor Compensation/full plan year compensation).

I would have thought - - - in both cases - - - that there is no violation, since it can't be that the 401(k)(12) rules dictate the eligibility period for making deferrals.

Thanks.

[Guest SloWorker]

No one answered here so I'll give it a shot...

For your first example, I would agree there would be no violation here. I saw two things to consider. First, it's not uncommon to see bonuses included in the definition of compensation. If bonuses are excluded from the definition of compensation, did the participant have the option to defer? If bonuses are included and he did have the option to defer there would be no violation: "Treas. Reg. § 1.401(k)-3©(6)(iii) requires that each NHCE in a safe harbor plan be allowed to defer at least the amount required to receive the maximum amount of matching contributions available under the plan." The keyword here is "allowed."

For your second example, you cannot defer retroactively and you cannot defer if you are not a participant. However, and again, keyword, if the eligible employee becomes a participant and is allowed to defer at least 4% (or "at least the amount required to receive the maximum amount of matching contributions") of his compensation per pay period I do not see any violation possible. I believe it's more of a matter of translating Treas. Reg. § 1.401(k)-3©(6)(iii) than the definition of safe harbor compensation superseding the definition of eligibility.

And that's all I have!