Safe Harbor NEC plan for NHCEs only BRF

[buckaroo]

I have a new prospective client and we are discussing plan designs. I have discussed the possibility of a safe harbor plan. I informed them that the SH allocation only needs to be provided to the NHCEs. They then asked about other allocations to the HCEs. My questions are as follows:

1) My thought has always been that a SH plan could be designed with the 3% SHNEC to only NHCEs. It could also have a New Comparability feature with two groups: NHCEs and HCEs. Due to the fact that a 3% SHNEC was being given to the NHCEs, a regular 3% NEC could be give to the HCEs without any type of coverage/nondiscrmination testing. Does anyone disagree with this statement? What about a BRF issue? I do not think it is an issue, but would like confirmation. Thoughts?

2) My thought has always been that a SH plan could be designed with the basic SHMAC to only NHCEs. It could also have a discretionary match feature. Due to the fact that a basic SHMAC was being given to the NHCEs, could the discretionary match of 3% (100% of the first three percent) be given to only the HCEs? I do not believe that there would be any coverage issue, but the ACP test would need to be run. However, if I tested all of the match allocated to the plan and it passed, then there would be no nondiscrminination testing issue. Agree? Additionally, I am concerned about a BRF issue? Based on the basic safe harbor match formula and a match capped at 3% for all, would this be OK? Thoughts?

Any help would be greatly appreciated.

[buckaroo]

I never received a reply to the original posting. I am reposting to see if anyone has any thoughts on the OP.

[ETA Consulting LLC]

I'll give it a shot, but believe many others (e.g. Tom Poje, Kevin C, or Sieve) may give you a more accurate analysis.

The rule: Benefits, Rights, and features must be currently and effectively available on a non-discriminatory basis. This means that you are not allowed to write an provision in the plan that states that "this benefit will only be provided to HCEs"; nor are you allowed to draft a provision that, when operated, only applies to HCEs (or a disproportionate percentage of HCEs).

In your first situation, everything is okay because there is no written provision precluding NHCEs from receiving a discretionary nonelective. When the HCEs are the only ones receiving the discretionary allocation, 401(a)(4) is passed by taking into account all NECs to the plan (including the safe harbor to NHCEs). This is not big deal; do it all the time.

In your second situation, my problem would be with the provision in the plan stating that HCEs are the only ones receiving a discretionary match. My contention is that even though you will pass 410(b) and even ACP, you fail current availability by having a written provision providing this match to only HCEs. With that said, I believe any prototype sponsor could include an option in the Safe Harbor Match Section of the Document stating that the Safe Harbor Match to HCEs would be provided at the discretion of the employer each year. It would likely be a coin toss whether the IRS would shoot it down (based on there being no wait-and-see option for the Safe Harbor Match, but actually contemplating that the entire foundation of it only needing to be given to NHCEs is not compromised. In this end, this is just a cliff that I would stay away from.

Good Luck!

[Bird]

#1 no problem; to be precise it is not "a regular 3% NEC could be give to the HCEs without any type of coverage/nondiscrmination testing" but "we know this allocation will pass general testing on a contributions basis because we've already given it to the NHCEs."

#2 I agree with ETK - I'm not 100% sure but I wouldn't do it.

[Guest Quagmire]

2) My thought has always been that a SH plan could be designed with the basic SHMAC to only NHCEs. It could also have a discretionary match feature. Due to the fact that a basic SHMAC was being given to the NHCEs, could the discretionary match of 3% (100% of the first three percent) be given to only the HCEs? I do not believe that there would be any coverage issue, but the ACP test would need to be run. However, if I tested all of the match allocated to the plan and it passed, then there would be no nondiscrminination testing issue. Agree? Additionally, I am concerned about a BRF issue? Based on the basic safe harbor match formula and a match capped at 3% for all, would this be OK? Thoughts?

I think that for BRF testing this right to a HCE discretionary match can be permissively aggregated with the right to a safe harbor matching contribution for NHCE (see § 1.401(a)(4)-4(d)(4)) . The two requirements for permissive aggregation appear to be met, as long as the plan doesn't attach any additional BRF to the HCE match:

1. §1.401(a)(4)-4(d)(4)(i)(A). The SHMAC is of inherently greater or equal value to the HCE match, and

2. §1.401(a)(4)-4(d)(4)(i)(B). The SHMAC separately meets the current and effective availability requirements.

Having said all that, I'm not expert in 401(k) plans specifically, this is just based on my 401(a)(4) experience, so I undoubtedly overlooked anything that modifies or prohibits normal BRF testing for these plans.

[Kevin C]

I agree that #1 in the OP is not a problem. We have several plans that pair a new comparability allocation with the 3% SH. I've been using the option to have each person in their own allocation group. With the 3% SH counting towards the gateway, if you can pass the 401(a)(4) general test, you can get the HCE's to 9% total without being required to contribute more for the NHCE's.

For OP #2, Quagmire addressed the BRF issues. I've looked over the SH regs and don't see anything that would prevent the design from being SH as long as the provisions are written carefully. It should fit within the match limitations in the SH Regs. If the discretionary match only applies to deferrals not in excess of 3% of comp and is limited to no more than a 100% match, it should work. I don't think you will find a prototype or VS document that allows that kind of provision. You would likely be using an individually designed document or a minor modification to a VS document, so you would be submitting for a determination letter. Since the design is a little outside the box, a determination letter would be a good thing to have.