Increasing Safe Harbor NEC

[Logan401]

Hello All,

I have a 2 part question.

1) Can a client have a 5% Safe Harbor NEC formula, or would this be viewed as a 3% NEC with the remaining 2% discretionary?

2) Can a client have a 3% Safe Harbor NEC, and decide to increase the safe harbor to 5% during the plan year?

I understand that you cannot change a match formula mid-year, as that directly affects some NHCEs that may have stopped deferring or have decreased their deferrals.

I am not clear on the NEC, which is directly related to compensation, and everyone would get the same increase across the board.

[Tom Poje]

depends on how the document is worded.

some actually say "at least 3% safe harbor" will be provided

[Logan401]

If the "at least 3%" language is included, that would keep the plan in safe harbor for both scenarios, correct?

[austin3515]

We're not suggesting that there is anything discretionary about a SHNEC- are we? So for exampole, the client couldn't arbitrartily decide in March following the end of the plan year that this year the SHNEC will be 5%, right?

For starters, I think all those people who were employed on the last day of the plan year would have a cut-back in profit sharing contributions since terms are excluded (hypotehtically); i.e., if the extra money was allocated as SHNEC and not PS.

[Logan401]

We're not suggesting that there is anything discretionary about a SHNEC- are we? So for exampole, the client couldn't arbitrartily decide in March following the end of the plan year that this year the SHNEC will be 5%, right?

For starters, I think all those people who were employed on the last day of the plan year would have a cut-back in profit sharing contributions since terms are excluded (hypotehtically); i.e., if the extra money was allocated as SHNEC and not PS.

No, we are not suggesting the SH is discretionary. For scenario #1, it would be written as the safe harbor formula.

Must you run top heavy if you provide a 5% NEC instead of a 3% NEC?

For scenario 2, are you allowed to increase the SH NEC during the plan year if you do not use the "at least 3% NEC" language in the agreement?

Is it okay if you do use the "at least" language, or are you suggesting you cannot because it may cut-back discretionary ps contributions?

[BG5150]

As long as the plan says "at least" and the specific amount for the year is explicit in the Notice, I don't see anything wrong with it.

The SH NEC is not like a SH match in that it has a cap.

[austin3515]

So you are going to allocate a contriubtion that is not included in the document? I just don;t feel right about it. You need something more than a notice to get it not to be profit sharing, subject to profit sharing alloation rules.

At least that's what I think...

[Logan401]

So you are going to allocate a contriubtion that is not included in the document? I just don;t feel right about it. You need something more than a notice to get it not to be profit sharing, subject to profit sharing alloation rules.

At least that's what I think...

For scenario # 2, the notice went out that they would provide a 3% NEC. The client is now asking if he can raise that amount to a 5% NEC instead.

Would that cause a problem if another notice went out stating the increase?

[BG5150]

For scenario # 2, the notice went out that they would provide a 3% NEC. The client is now asking if he can raise that amount to a 5% NEC instead.

Would that cause a problem if another notice went out stating the increase?

I would say yes, it's a problem. Plan says at least 3% and they told people it was going to be 3%.

It sounds like the ER wants to give an extra 2% to avoid Top Heavy testing?

But, if everyone is getting 3% Safe Harbor, it'll probably be enough for most of them to satisfy Top Heavy. (You may have a case where the SH is based on participation compensation, but the true up to 3% of full year comp will probably be less than the extra 2% across the board.)

So why doesn't the ER just do the stated 3% SH and do a 2% PS on top?

[Logan401]

For scenario # 2, the notice went out that they would provide a 3% NEC. The client is now asking if he can raise that amount to a 5% NEC instead.

Would that cause a problem if another notice went out stating the increase?

I would say yes, it's a problem. Plan says at least 3% and they told people it was going to be 3%.

It sounds like the ER wants to give an extra 2% to avoid Top Heavy testing?

But, if everyone is getting 3% Safe Harbor, it'll probably be enough for most of them to satisfy Top Heavy. (You may have a case where the SH is based on participation compensation, but the true up to 3% of full year comp will probably be less than the extra 2% across the board.)

So why doesn't the ER just do the stated 3% SH and do a 2% PS on top?

Why would it be a problem if they communicated 3%, but decided to make it 5%? i would jump for joy in today's economy!

The plan is not in danger of top heavy, so that is not an issue.

Even if it was, I do not understand how a higher NEC would cause any plan concerns.

[Kevin C]

If the SHNEC is written into the document as a 3% contribution, 1.401(k)-3(e)(1) prevents you from amending to change it to 5% after the first day of the plan year.

But, as Tom mentioned, it depends on what the document says. Our adoption agreement format VS document has a place to elect a SH non-elective contribution of a percent of compensation that must be at least 3%. In the base document, it says "The Employer has the discretion to increase the amount of the Safe Harbor Employer Contribution in excess of the percentage designated under AA §6C-2(b)." Since we have an opinion letter on the document, I would say that provision satisfies the SHNEC contribution requirement:

1.401(k)-3(b)(1)General rule.—

The safe harbor nonelective contribution requirement of this paragraph is satisfied if, under the terms of the plan, the employer is required to make a qualified nonelective contribution on behalf of each eligible NHCE equal to at least 3% of the employee's safe harbor compensation.

[Tom Poje]

a few years ago when I was on the IRS Q and A panel, I personally submitted this very question, basically could the notice say "at least 3%". As I recall the initial reaction from the agents was something to the effect, what type of goofy question is that...it's quite clear in the regs...huh, how about that, it does say 'at least', so they agreed that it would be possible.

again, I'd be concerned if my notice said "The plan will provide a 3% SHNEC..." as opposed to saying "The plan will provide at least 3%..."

[austin3515]

1.401(k)-3(b)(1)General rule.—

The safe harbor nonelective contribution requirement of this paragraph is satisfied if, under the terms of the plan, the employer is required to make a qualified nonelective contribution on behalf of each eligible NHCE equal to at least 3% of the employee's safe harbor compensation.

To me, that is a pretty aggressive interpreatiopn when, to me, it is entirely clear that the spirit of the reg is to allow you to require (as is the case here) 5% without violating the rules.