Safe Harbor 3% non-elective vs. Safe Harbor Match

[Chippy]

I have a client that is considering swithing from Safe Harbor 3% non-elective to the Safe Harbor basic match. They are asking if participation will increase with the match. I think it will, but are there any articles or studies out there on how switching to the SH match will effect participant and deferral rates?

Thanks

[ETA Consulting LLC]

This could go either way. Typically, it is best to look at exactly what the client is trying to accomplish with the change. For instance, if the client is wondering if the change will result in an additional 1% being funded to the plan since the change will now induce employees to defer, then the chances of individuals who are not currently deferring to begin may largely depend on their salary; an 80% return on the first 5% deferred would imply that anyone who can afford it will take advantage of it. So, anyone who is (let's say) at $30K or above may be inclined to contribute.

Let's suppose the client makes the change and every single employee now begins to defer at least 5% of salary in order to receive the 4% match. So, the client is out an additional 1%. Does the client give the employees raises each year? Let's suppose they do, and the average raise is 3% of salary. For the first year, the client can give raises of only 2%, and the change from the SHNEC to the SHMAC would have fully paid for itself while saving the client money from not having to pay increased FICA on what would've been additional compensation.

There are many variables. You should look at what the client wants to accomplish and then address 'ALL' questions that need to be asked. Just a thought.

Good Luck!

[Bird]

This could go either way.

Amen. I think study results would be unreliable as plan demographics can vary widely; one plan could have some single parents who couldn't contribute no matter what and another could have second-income spouses who are trying to shelter as much as possible.

As a general rule, if the employer is trying to maximize contributions for the owner(s) and/or a small group of select employees, the non-elective safe harbor works best as a building block for additional profit sharing contributions, especially in a top-heavy plan. And the humanitarian in me isn't that crazy about matches anyway because there are some people who truly can't afford to make their own contributions and I like to see them getting at least 3% from the employer. I have serious reservations about the public policy benefits of matching contributions.

I generally think of the SH match as a solution for someone with "a lot" of employees who wants to maximize 401(k) contributions without testing but not go beyond the 401(k) limits. "A lot" for me means the ratio of owner comp to total comp is somewhat less than 50%.