Safe Harbor Match (Per Pay Period) in Partnership

[Guest Holly Foster]

Here are the facts. The plan is sponsored by a Partnership. The Partners generally earn less than the annual compensation limit, so their "compensation" is Net Earnings from Self Employment (NESE) and is not determined until after year end when their K-1's are being completed. The Partners all sign 401(k) deferral elections prior to year end. The Employer contribution each year is a standard Safe Harbor Match formula (100% of the 1st 3% of compensation deferred and 50% of the next 2% of compensation deferred) deposited per payroll with no true up at year end. The staff's (all NHCE's) contributions 401(k) and Safe Harbor Match are deposited with each paycheck they receive throughout the year. Several Partners (mostly HCE's) contribute their 401(k) deferrals and Safe Harbor Match during the year, but many wait until the calculations are performed after year end so their exact contributions due can be calculated based on their NESE. This raises several questions:

• Can Partners contribute matching contributions where the formula is based on compensation (or deferral amounts where a percentage of compensation is elected) throughout the year from draws or must they wait until after year end to make contributions because that is when their compensation (NESE) is determined?

• If the Partners were to wait until after year end to contribute each of their Safe Harbor Matching contributions would be based on Annual Compensation whereas the staff's Safe Harbor Matching contributions were based on the staff's pay period compensation. Since most of the Partners are HCEs and most of the Staff are NHCEs, does this create a discrimination issue? Or not, because the Partner's pay period is only once at year end?

• Assuming the Partnership wanted to amend to an Annual Match (or Pay Period with True-up) can this be done after the year is over or mid-year in the following year (provided the Safe Harbor Notice is updated) since the amendment would only by increasing NHCE's benefits?

• Alternatively, if the Partner's contributions are made during the year from their draws, would the match also have to be calculated per pay period only on the amount received in that draw? For example if a Partner contributed 401(k) deferrals of $10,000 during the year from $50,000 in one draw the Safe Harbor Match per Pay Period on that contribution would be $2,500, but if the Pay Period match is calculated on Compensation (NESE = $200,000) the Safe Harbor Match per Pay Period would be $8,000?

Any input is appreciated!

[Bird]

I don't like per pay period matches for a lot of reasons, and don't want to get sucked into a discussion that is only theoretical to me, but I can say...

I don't think you can amend until the end of the year.

I think partner matches have to be based on the full year's compensation. I don't see how you could match based on a periodic draw; I've seen plenty of times where partners took draws during the year and then had losses that wiped most or all of that income away, and it would be wrong, I think, to match based on draws which are, IMO, arbitrary and meaningless for plan purposes. I don't think it would be discriminatory to match partners on full year's pay since they technically have one pay period per year, on Dec 31.

[jpod]

The answer is that the concept of "pay period" is inapplicable to partners, unless they receive guaranteed payments. Partners have one "deemed pay period" and that is 11:59:59 pm on the last day of the partnership's taxable year.