Safe Harbor Plan with After Tax

[justatester]

Plan is a safe harbor plan, but allows for after-tax. Plan ues the "prior" year testing method. When running the test, can we include and not include the match in the ACP test to achieve the best results.

For example,

2009 testing: HCEs AT only compared to 2008 NHCE AT only

2010 testing: HCEs SH Match & AT compared to 2009 NHCE AT and SH Match

2011 testing: HCEs AT only compared to 2010 NHCEs AT only

It would be eaiser if the plan changed to current year testing. Which we are working on!

Any thoughts would be greatly appreciated!

[four01kman]

Generally, you cannot choose whether to add or not include employee contributions and/or matching contributions.

1.401(m)-2(a)(3) Determination of ACR—(i) General rule. The ACR of an eligible employee for the plan year or applicable year is the sum of the employee contributions and matching contributions taken into account with respect to such employee (determined under the rules of paragraphs (a)(4) and (5) of this section), and the qualified nonelective and elective contributions taken into account under paragraph (a)(6) of this section for the year, divided by the employee’s compensation taken into account for the year. The ACR is calculated to the nearest hundredth of a percentage point. If no employee contributions, matching contributions, elective contributions, or qualified nonelective contributions are taken into account under this section with respect to an eligible employee for the year, the ACR of the employee is zero.

[justatester]

When you are testing a Safe Harbor Plan with an after-tax feature, you have the option of including or not including the match--correct? My question is can you change from year to year?

[Kevin C]

Will this help?

1.401(m)-2(a)(5)(iv)Matching contributions taken into account under safe harbor provisions.—

A plan that satisfies the ACP safe harbor requirements of section 401(m)(11) or 401(m)(12) for a plan year but nonetheless must satisfy the requirements of this section because it provides for employee contributions for such plan year is permitted to apply this section disregarding all matching contributions with respect to all eligible employees. In addition, a plan that satisfies the ADP safe harbor requirements of §1.401(k)-3 for a plan year using qualified matching contributions but does not satisfy the ACP safe harbor requirements of section 401(m)(11) or 401(m)(12) for such plan year is permitted to apply this section by excluding matching contributions with respect to all eligible employees that do not exceed 4 percent (3½ percent in the case of a plan that satisfies the ADP safe harbor under section 401(k)(13)) of each employee's compensation. If a plan disregards matching contributions pursuant to this paragraph (a)(5)(iv), the disregard must apply with respect to all eligible employees.

[justatester]

Ok...now I the question becomes...

If a plan is deemed safe harbor for both ADP & ACP testing, but must still complete an ACP test for after-tax...which testing method is permitted?

Plan Document states prior, but since it is safe harbor must it be current?

[Kevin C]

Interesting question. Our VS document has a note in the adoption agreement that an ACP SH plan must use current year testing. What does your plan say? The regs say that for purposes of the rules for changing the testing method, an ACP SH plan is treated as using the current year method.

1.401(m)-2©Additional rules for prior year testing method

(1)Rules for change in testing method.—

A plan is permitted to change from the prior year testing method to the current year testing method for any plan year. A plan is permitted to change from the current year testing method to the prior year testing method only in situations described in §1.401(k)-2©(1)(ii). For purposes of this paragraph ©(1), a plan that uses the safe harbor method described in §1.401(m)-3 or a SIMPLE 401(k) plan is treated as using the current year testing method for that plan year

[justatester]

I did actually find reference in our prototype document that states current year testing would be used.

If the document does not have specific language, would you use current? Or if the document indicates prior year when testing is required use prior?

My original understanding is that if a plan is safe harbor it is deemed current in any year testing would be required. But, we have had many a discussion surrounding the issue. Is there a time when prior would be appropriate?

[K2retire]

I thought it was an IRS requirement, not a document question, that current year testing be used.

[Kevin C]

I thought it was an IRS requirement, not a document question, that current year testing be used.

That's what I thought, too. But, that's not exactly what the regulations say. From the LRMs, it appears the IRS interpretation is that SH requires current year testing. Of course, if the document says safe harbor means you must use current year testing, the document controls. The pre-approved documents we have used all say SH requires current year testing. We don't have any plans that allow old style after-tax contributions, so I haven't had to look at this before.

From the 401(k) LRMs:

Sample Plan Language:

Article [ ] Safe Harbor CODA

Section 1. Rules of Application

1.1 If the Employer has elected the Safe Harbor CODA option in the adoption agreement, the provisions of this article shall apply for the Plan Year and any provisions relating to the ADP test described in Code § 401(k)(3) or the ACP test described in Code § 401(m)(2) do not apply.

[Note to Reviewer: This LRM XX provides sample plan language for Plans using the safe harbor methods to satisfy the ADP and ACP tests. If Matching Contributions that do not satisfy the ACP Test Safe Harbor or Employee Contributions can be made under the Plan, then this language, including that in Section 1.1 above, will have to be modified to satisfy the relevant portions of LRMs XII and XIII using the Current Year Testing method and specifying which contributions will be used in the ACP test. See Regulations §§ 1.401(m)-2(a)(5)(iv) and 1.401(m)-3.]

[Tom Poje]

buried in 1.401(k)-3(f)(1) ...a plan that provides for the use of the current year testing method may be amended [to a safe harbor]

granted, this is in regards to a safe harbor 'maybe' situation, but it is sort of in the regs.

[justatester]

Thanks for the information...here is another question:

Custom Plan document designates "Prior Year" testing for both ADP & ACP. It is a QACA, however, the match formula is 100% up to3% then 50% up to 9%. So it satisfies the ADP Safe Harbor requirement, but since they match above 6% it requires ACP testing.

Do/Can I run it "prior" year? If I do, can I count the full 2010 NHCE match in the 2011 test? Or am I limited to counting only the match above 6% since the match up to 6% was used to satisfy the 2010 ADP test?

[Kevin C]

See post #4 above about what match to count.

If the plan is not ACP SH, you can use prior year ACP testing as long as the document allows it. For your ADP testing method, I think the document saying prior year ADP testing is a problem.