Here's a wierd thought

[imchipbrown]

Let's say I have a 10% MP Plan with 1 year wait and no last day or 500 hours/ termination requirement. I want to use this to satisfy a Safe Harbor.

What would you think if made the vesting schedule 0,34%,40%,60%,80%,100%.

My thought is 10% times 34% equals 3+% vested contribution, and easy admin.

Any darts to throw?

[Alf]

I think that the safe harbor match has to be fully vested and that the only other option was to use QNECs (which have to be fully vested by definition). I don't think that the existing IRS guidance will stretch enough to cover this setup.

[Guest JF]

Why do that when you can just designate 3% of the 10% as the Safe Harbor Contribution ?

Since there is no approved language yet for Safe Harbor, you can simly satisy the requirement with the notice that a 3% non-elective contribution will be made to another plan )the MP plan) and that will satisfy the Safe Harbor for your 401(k).

The 3% will have to be kept in a separate source, but then the other 7% can be subject to vesting, 100 hours, last day etc....

[imchipbrown]

I was thinking more of the 3% non-discretionary, not match.

What I see as the beauty is that the 3% (100% vested) wouldn't have to be separately accounted for.

It's a a good point that I've "given away" 14% of the remaining 7% by virtue of accelerating the vesting from the "normal" 20% to 34%, but in practice, I'm sure the dollar figure is small. As well, I'm giving terminees with less than 500 hrs a contribution. But again, when I put the pencil to it, the numbers are trivial ('cuz it's not My Money).

My glance at the regs doesn't seem to mandate a "separate" 3% vested contribution. Under the Safe Harbor Match (which I'm not talking about here), IRS saw fit to allow equivalencies.

And, I've actually put participants in a better position.

[MWeddell]

Assuming of course that you look at the plans carefully to check eligibility, definition of compensation used for the MP plan contribution, etc., I like this idea. If the plan currently has a 20% vesting schedule the first year, then you'd only need to increase it to 30%, not 34% unless I'm missing something.

I do think that you'd have to change the plan document even though the change would be invisible to participants. You'd have to break it apart into two contributions, a 3% contribution that is fully vested and a 7% contribution with a vested schedule of

0% after one year

14.29% after two years

42.86% after three years

71.43% after four years

100% after five years

I would tend to want the recordkeeper to track these dollars separately even though they'd be lumped together on participant statements, but I guess that's not legally required if the plan document doesn't mandate that.

Incidentally, I've done this sort of thing with the traditional 401(k) testing rules to convert 1/5th of an employer nonmatching contribution with a 1-5 year graded vesting schedule and a one year eligibility period into a QNEC that substantially helps the 401(k) test.

[Wessex]

How would this change be transparent to participants? Surely the vesting schedules must be disclosed in the SPD.

[david rigby]

What a lot of hassle! Are you really saving anything with such an awkward schedule of vesting? And keeping up with such percentages seems like a pain in the .....

[MWeddell]

The change would be transparent to participants because it could continue to be communicated as a 10% MP contribution with the current vesting schedule even though the plan document would separate it into a 3% QNEC and a 7% contribution with the odd vesting schedule mentioned in my earlier post.

I don't think it's much of a hassle considering one avoids the ADP/ACP tests and no extra cost to the plan sponsor other than some small implementation costs.

[imchipbrown]

I think we've taken our eyes off the ball here. My idea is simply a 10% MP with 30% (thanks for correcting my math) first year of participation vesting. No fancy accounting, no trying to separate out the 3%. We know it's in there somewhere. That's all that's important. Trying to identify which dollar is the 100% vested 3% is needless mental gymnastics.

[Guest JF]

I think there are some other issues if you don't separate out the 3%. For example, the 7% portion of your MP contribution that would normally be subject to vesting, may also require the 1000 hours and last day to get the contribution, while the 3% can't. The compensation number ysed to calculate the 7% may be defined in the doc diferently than the 3% is required to be. While the 30% vesting schedule gives the participant the reqired vested balance, it may not really if he contribution is never made in the first place. So no matter, you will still have to calculate the 3% differently than the rest of the MP contribution.

[imchipbrown]

As the thread grows, we learn...

I've conceded the 500 hr and last day stuff already. JF brings up a great point about compensation definitions.

My reading is that it has to be a fairly standard 414 definition and uniform.

The scheme could fall flat on it's face if comp in excess of x dollars were excluded. There may be other problems that I haven't thought of.

Barring these caveats, why are we still talking about the three and the seven? I'm talking about the ten.

I know a lot of you are probably sick of this topic rising to the top of the topic with each of my posts, but I've not yet reached the unclearable hurdle.

I'm also wondering where Baker stands on this. Too busy improving the site, I guess. What a forum!

[Guest RJM]

Whatever happened to the K.I.S.S. theory? So what if the Participants get 3%, 100% vested immediately and is separately identified on the statement. This is GREAT employee relations fodder for the Employer: "Look what we're doing for you!" Use the old 7-year stretch for the remaining dollars in a separate source. You've then got a simple, easy to understand, easy to explain participant statement (unless there are 900+ fund options). Administrative AND LEGAL costs should be kept to a minimum (unless your client is Mr. Deep Pockets who doesn't care about such things).

[Bob R]

I think the 3% safe harbor may need to be tracked separately. Keep in mind that it must be a nonelective contribution subject to the same distribution restrictions as QNECs. This means most of the distribution restrictions that apply to elective deferrals apply to the 3% contribution. While money purchase plans are generally restricted as to when distributions may be made, one permissible event is "severance of employment." However, for elective deferrals (and the 3% safe harbor) there must be a "separation from service." The IRS has just relaxed the same desk rule a little, but not completely.

Or, money purchase plans may provide for a distribution upon termination of the plan. But, elective deferrals (and the 3% safe harbor) may generally not be distributed if there is a successor plan.

Right now you can operationally apply the safe harbor rules. But when plans are updated for GUST, money purchase plans will need to add the restrictions found in Regulation 1.401(k)-1(d) for the safe harbor contributions. I guess you could apply these restrictions to all money purchase assets. But, if the plan is already in existence and doesn't contain the restrictions, there might be some 411(d)(6) cut back issues with respect to the existing money purchase contributions.