Limit safe harbor contribution to HCEs

[WhoLetTheDogsOut]

Can a plan provide a limited safe harbor contribution to HCEs as long as the full safe harbor contriburtion is made for NHCEs? For example, the plan provides a 3% safe harbor nonelective to NHCEs but HCEs only receive a 1% safe harbor contribuiton. Or for a safe harbor matching contribution plan, the plan provides a basic safe harbor match to NHCEs but provides a lesser match to HCEs.

[ETA Consulting LLC]

No. A safe harbor, by definition, must be 'AT LEAST' 3%. We know that the only individuals required to receive it are NHCEs, but once you decide it will be received, then it must be AT LEAST 3%. With that said, it "MAY" be provided on any definition of Compensation that satisfies 414(s). So, you'd be better providing exclusions to Compensation that impact only HCEs. Arguably, you may say HCEs will receive safe harbor contributions on only the first $100K of Compensation while everyone else (e.g NHCEs) will receive it on full Compensation. They're still receiving 3%, but only on a fraction of their Compensation.

Just an approach to consider.

Good Luck!

[austin3515]

Exclude HCE's from SHNEC, and then give the HCE's a 1% profit sharing.

My suggestion MIGHT fall apart if the plan is top-heavy (if you have dual eligiblity for example and a lot of eligibles not getting the 3% SHNEC already).

[WhoLetTheDogsOut]

Exclude HCE's from SHNEC, and then give the HCE's a 1% profit sharing.

My suggestion MIGHT fall apart if the plan is top-heavy (if you have dual eligiblity for example and a lot of eligibles not getting the 3% SHNEC already).

Yep, the plan is top heavy. Hence, my problem. I am wondering about the compensation limit idea. Would that be a document issue or could it just be stated in the notice. My document does not allow for such a provision.

[austin3515]

If the suggestion is to define the HCE's Comp as 1/3 of total comp, that won't work. I'm pretty sure there is something in the regs that says it is a no-go.

Are all of the HCE's maxing out their 401(k)? If not, you could do a 1% bonus for them and let them defer 100%. Assuming they are over the wage base, the only disadvantage would be medicare payroll taxes.

[MWeddell]

Going back to the original question, I believe the answer is yes. Providing a 3% nonelective QNEC to NHCEs and a 1% nonelective QNEC to HCEs satisfies Treas. Reg. 1.401(k)-3(b)(1): "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."

Post #2 of this thread asserts that if the contribution is provided to an HCE, it must be at least 3% of pay. I do not read the regulation to mandate that.

[ETA Consulting LLC]

Post #2 of this thread asserts that if the contribution is provided to an HCE, it must be at least 3% of pay. I do not read the regulation to mandate that.

There was nothing to state the HCEs are required to receive anything, but stating that "IF" is it a "safe harbor nonelective contribution", then it must be 3%.

Good Luck!

[austin3515]

I think MWeddell has a point here on his interpretation. Do you not agree with his position here?

[Bill Presson]

Give the HCE's a pay cut and give them the entire 3% safe harbor.

[austin3515]

I'd like to be on speaker phone when you try to explain that to the HCE's!

For whatever it is worth, after reading MWedell's post, I am in complete agreement that it works with the HCE's at 1%. It clearly states the SHNEC for the NHCE's needs to be at least 3%. It imposes no minimum for HCE's, which is the very same reason we can give them 0%.

[Tom Poje]

if I recall correctly, the comp used for safe harbor purposes need only satisfy 414(s), so if the HCE comp is the only one limited I would guess that would pass the smell test.

[WhoLetTheDogsOut]

I'd like to be on speaker phone when you try to explain that to the HCE's!

For whatever it is worth, after reading MWedell's post, I am in complete agreement that it works with the HCE's at 1%. It clearly states the SHNEC for the NHCE's needs to be at least 3%. It imposes no minimum for HCE's, which is the very same reason we can give them 0%.

Ring, ring. "Hello." "Hello, Mr. HCE. Our 401k plan is now top heavy so we are going to implement a safe harbor match. However, since you make as much as Mitt Romney, we don't have to give it to you. However, we will give you a 4% match if you will take a 3% pay cut. How about it?"

[ETA Consulting LLC]

However, we will give you a 4% match if you will take a 3% pay cut. How about it?"

No. NO. NO. You're not giving them a pay cut. You're saying, we're giving you a 4% match, but we're only giving it to the first $100,000 in Compensation. Hence, if your Compensation exceeds $250,000, your match will be limited to $4,000; since we're only matching the first $100,000 of Compensation.

Good Luck!

[ETA Consulting LLC]

I am in complete agreement that it works with the HCE's at 1%.

Try defining a SHNEC at a percentage of less than 3%. There is no debate as to whether or not an HCE must receive it; they clearly do not. There is also no debate on whether an HCE can receive a percentage less than that received by NHCEs; as it will automatically satisfy non-discrimination.

BUT, IF is it less than 3%, then it cannot be defined as a SHNEC; this is where we disagree.

Good Luck!

[austin3515]

But can you tell me why that is your position?

[ETA Consulting LLC]

But can you tell me why that is your position?

I thought I did that.

A SHNEC is a minimum of 3%. The only requirement is that NHCEs receive it. It is optional for HCEs to receive it. It is not required to be given on 415 Compensation, but instead any definition that meets 414(s). It still has to be 3%.

When you suggest that it is possible to provide a contribution of less than 3% and still have it treated as a SHNEC merely because it is given to an HCE, I would disagree because a SHNEC must be 3%. So, go ahead and give the HCEs a 1% Contribution instead of 3%; but that 1% won't be a SHNEC.

3% is the the definition of a SHNEC.

Good Luck!

[Kevin C]

If the suggestion is to define the HCE's Comp as 1/3 of total comp, that won't work. I'm pretty sure there is something in the regs that says it is a no-go.

You got me curious. After looking at the regs, it might work. The reasonable definition requirement mentioned that would normally prevent a compensation definition of 1/3 of Comp is in 1.414(s)-1(d)(2). But, look at the following:

1.414(s)-1©(5)Exclusions applicable solely to highly compensated employees.—

Any definition of compensation that satisfies paragraph ©(2) or ©(3) of this section, with or without the modification permitted by paragraph ©(4) of this section, may be modified to exclude any portion of the compensation of some or all of the employer's highly compensated employees (including, for example, any one or more of the types of elective contributions or deferred compensation described in paragraph ©(4) of this section). This paragraph ©(5) only permits modifications that apply to the compensation of highly compensated employees. See paragraph (d) of this section for requirements with respect to any modifications in defining the compensation of nonhighly compensated employees.

Putting it together, © lists compensation definitions that automatically satisfy 414(s). Then, ©(5) says you can modify one of those definitions to exclude some or all of the HCE's compensation. The reasonable definition requirement is part of the rules for using an alternative definition under 1.414(s)-1(d). The problem may be getting that kind of provision into the document. I'm thinking that you would also need to limit the HCE compensation to 1/3 of the 401(a)(17) limit. If an HCE making $300,000 gets a larger allocation than one making $250,000, I think you would have difficulty arguing you were not considering compensation in excess of the 401(a)(17) limit in determining benefits.

[ETA Consulting LLC]

Kevin C,

You're right. This is a major skill in drafting a plan (or completing an adoption agreement). You must ensure your intent in accruately reflected and avoid the ambiguity. I was thinking of merely hardcoding a dollar limit (i.e. $100,000) without automatic indexing. This dollar limit would change by amendment, but only when the Employer chooses to make the increase.

Good Luck!

[DMcGovern]

Have you seen any prototype or volume submitter documents that would allow for a SHNEC less than 3% to HCE's? The ones that I'm familiar with only allow for the exclusion of HCEs from this contribution allocation. Not arguing that the regs would not provide this, but maybe it would be individually designed?