Disproportionate Safe Harbor Match

[Blackbirch]

A colleague of mine and I are disagreeing over a plan's ability to provide a disproportionate match as a Safe Harbor contribution.

A disproportionate match, defined at 1.401(m)-2(a)(5)(ii), occurs, generally, where an NHCE receives a match that is greater than both (a) 100% of deferrals and (b) 5% of compensation. So, for example, a match of 200% up to 3% of comp would be fine until you defer past 2.5% of comp (at which point the contribution exceeds 5%).

Generally, the consequence is that the disproportionate portion is ignored for testing purposes. Because only NHCE amounts can be disproportionate, it's meant to prevent trying to game the ADP/ACP test with weird matches.

Here's the issue: In defining a safe harbor match, 1.401(m)-3(j) says the contribution will only be taken into account if it meets 1.401(k)-3(h)(1), which, in turn, says the contribution needs to meet the requirements of 1.401(m)-2(a), which of course includes our friend the disproportionate match rules. The implication, then, is that you couldn't have a safe harbor matching formula that could produce a disproportionate match.

However, there doesn't seem to be any other support such a position. There's been no guidance that I can find on the interplay one way or the other. In all the articles/resources on permissible safe harbor matching formulas, nobody's mentioned the disproportionate match rules as an issue. Further, in laying out proposed safe harbor matching contributions, a number of the big-name providers have included formulas which would run afoul of the disproportionate match rules. Of course, none address the issue explicitly.

Has anybody ever heard of this analysis? Have you dealt with safe harbor formulas that may trigger disproportionate matching contributions?

[Tom Poje]

doesn't the rule under 1.401(m)-2(a)(5)(iv) matching contributions taken under account under safe harbor provisions apply?

[masteff]

Here's the issue: In defining a safe harbor match, 1.401(m)-3(j) says the contribution will only be taken into account if it meets 1.401(k)-3(h)(1), which, in turn, says the contribution needs to meet the requirements of 1.401(m)-2(a), which of course includes our friend the disproportionate match rules. The implication, then, is that you couldn't have a safe harbor matching formula that could produce a disproportionate match.

Are you misconstruing the words "is not taken into account"? It means "disregarded", not "disallowed". Furthermore, the relevant subparagraph says "under the ACP test"; so the concept only pertains to the ACP test. So your contributions must pass the ACP test while excluding anything that is disproportionate.

(ii) Disproportionate matching contributions —(A) Matching contributions in excess of 100%. A matching contribution with respect to an elective deferral for an NHCE is not taken into account under the ACP test to the extent it exceeds the greatest of:

[Kevin C]

As mentioned, the disproportionate match rules are part of the ACP test. You are talking about a safe harbor match. The applicable rules on the safe harbor match formula are in 1.401(k)-3© and 1.401(m)-3(d).

You also left off part of the disproportionate match rule.

1.401(m)-2(a)(5)(ii)Disproportionate matching contributions

(A)Matching contributions in excess of 100%.—

A matching contribution with respect to an elective deferral for an NHCE is not taken into account under the ACP test to the extent it exceeds the greatest of:

(1)

5% of compensation;

(2)

the employee's elective deferrals for a year; and

(3)

the product of 2 times the plan's representative matching rate and the employee's elective deferrals for a year.

In your example with a 200% match on deferrals not in excess of 3% of comp, as long as at least half of the eligible NHCEs who deferred receive the match, it won't be disproportionate because of (3).

[Blackbirch]

As mentioned, the disproportionate match rules are part of the ACP test. You are talking about a safe harbor match. The applicable rules on the safe harbor match formula are in 1.401(k)-3© and 1.401(m)-3(d).

In your example with a 200% match on deferrals not in excess of 3% of comp, as long as at least half of the eligible NHCEs who deferred receive the match, it won't be disproportionate because of (3).

Yes; I understand we're looking at the ACP testing rules, and that these generally wouldn't apply in the case of a Safe Harbor plan. However, the concern is that the Safe Harbor rules incorporate the 1.401(m)-2 ACP rules at 1.401(m)-3(j). The question becomes what meaning to give that incorporation.

As for the representative match approach, the concern I have is that we're working with a client with a very small plan that may have fewer than 5 NHCEs in any given year. If we're subject to the disproportionate match rules, I'd hate set up a safe harbor design that may fail depending on the deferral elections of only a couple of employees.

Thanks everybody for your thoughts. I think it's safe to say that we haven't heard from anybody who has heard of subjecting safe harbor designs to the disproportionate match rules.

[Kevin C]

What part of 1.401(m)-3(j) are you reading as requiring the safe harbor match to satisfy 1.401(m)-2?

The only references to 1.401(m)-2 I see in that paragraph are (3) saying the early participation rules of 1.401(m)-2 don't apply to make the otherwise excludible portion of the plan SH unless it actually is SH and (6) noting the ACP test still applies with respect to after-tax employee contributions. The term employee contributions is defined in 1.401(m)-5.

(3)Early participation rules.—

Section 401(m)(5)© and §1.401(m)-2(a)(1)(iii)(A), which provide an alternative nondiscrimination rule for certain plans that provide for early participation, do not apply for purposes of section 401(m)(11), section 401(m)(12), and this section. Thus, a plan is not treated as satisfying this section with respect to the eligible employees who have not completed the minimum age and service requirements of section 410(a)(1)(A) unless the plan satisfies the requirements of this section with respect to such eligible employees.

and

(6)Plan must satisfy ACP with respect to employee contributions.—

If the plan provides for employee contributions, in addition to satisfying the requirements of this section, it must also satisfy the ACP test of §1.401(m)-2. See §1.401(m)-2(a)(5)(iv) for special rules under which the ACP test is permitted to be performed disregarding some or all matching when this section is satisfied with respect to the matching contributions. [Reg. §1.401(m)-3.]

[Blackbirch]

What part of 1.401(m)-3(j) are you reading as requiring the safe harbor match to satisfy 1.401(m)-2?

1.401(m)-3(j)(1) -- Contributions taken into account. A contribution is taken into account for purposes of this section for a plan year under the same rules as 1.401(k)-3(h)(1).

1.401(k)-3(h)(1) -- Contributions taken into account. A contribution is taken into account for purposes of this section for a plan year if and only if the contribution would be taken into account for such plan year under the rules of §1.401(k)-2(a) or 1.401(m)-2(a). Thus, for example, a safe harbor matching contribution must be made within 12 months of the end of the plan year. Similarly, an elective contribution that would be taken into account for a plan year under §1.401(k)-2(a)(4)(i)(B)(2) must be taken into account for such plan year for purposes of this section, even if the compensation would have been received after the close of the plan year.A contribution is taken into account for purposes of this section for a plan year if and only if the contribution would be taken into account for such plan year under the rules of §1.401(k)-2(a) or 1.401(m)-2(a). Thus, for example, a safe harbor matching contribution must be made within 12 months of the end of the plan year. Similarly, an elective contribution that would be taken into account for a plan year under §1.401(k)-2(a)(4)(i)(B)(2) must be taken into account for such plan year for purposes of this section, even if the compensation would have been received after the close of the plan year.

We've been fighting over a couple different way to read this.

1. Because the language is written in the context of "for a plan year," this is only a timing rule. (Which would make sense, seeing as how we already have plenty of design limitations built into 1.401(m)-3.) This is supported by the fact that the two examples given in 1.401(k)-3(h)(1) are both timing rules.

2. "Taken into account" in this context means "exempted from testing." (edit: to clarify, the full amount of the proposed 200% of 3% would be treated as a permissible safe harbor contribution for both ADP/ACP purposes, but disproportionate portion would not enjoy the exemption from testing. Similar to a safe harbor match that matches deferrals beyond 6%.) The consequence would be that although the disproportionate matching rules would apply, because only NHCE contributions are disproportionate, this tested portion would automatically pass. Thus, the disproportionate match rules have no practical impact on safe harbor plans.

3. "Taken into account" in this context means "may be part of a safe harbor matching contribution." Because only NHCE contributions would be affected, in the case of a 200% match on 3%, the effect would be to reduce the NHCE safe harbor match to 200% of 2.5% (maxing out at 5% of comp), while HCE match remains at 200% of 3%. In this case, because HCEs would have the "superior" formula, the plan would not satisfy one of the basic precepts of an enhanced safe harbor match design (1.401(m)-3(d)(4)). Such a reading would effectively prohibit safe harbor designs that could lead to a disproportionate match.

Thanks again for your thoughts.

[masteff]

The following thread might be helpful, particularly the large post towards the end: http://benefitslink.com/boards/index.php?/topic/42558-match-of-more-than-100/ Keep in mind that the disproportionate match rule was added to prevent abusive bottom-up corrections.