401(k) Safe Harbor match to satisfy ADP only

[Belgarath]

I came upon the following - although I haven't seen (or perhaps noticed) a SH matching plan for ADP purposes only, with allocation restrictions on the additional DISCRETIONARY matching contributions as described, I also can't say that I'd ever really thought about it. Do you agree with the conclusions, or do you think that this paragraph is referring to SH matching contributions only, and not to additional discretionary match? It seems counterintuitive that a plan where the safe harbor match formula is correct would have the ADP SH blown by tossing in discretionary match.

ADP Safe Harbor Pitfalls

Treas. Reg. 1.401(k)-3©(4) (the ADP Safe Harbor rule) provides as follows regarding a plan that satisfies the ADP safe harbor with safe harbor matching contributions:

(4) Limitation on HCE matching contributions.-

The safe harbor matching contribution requirement of this paragraph © is not satisfied if the ratio of matching contributions made on account of an HCE's elective contributions under the cash or deferred arrangement for a plan year to those elective contributions is greater than the ratio of matching contributions to elective contributions that would apply with respect to any eligible NHCE with elective contributions at the same percentage of safe harbor compensation.

It is of utmost importance to note that the "ratio of matching contributions" mentioned in the regulation above does not differentiate between safe harbor matching contributions and any other matching contribution type. Therefore, if a plan is designed to use a safe harbor match to satisfy ADP testing, and it also provides for a discretionary (and/or additional fixed) match, then in order to maintain the benefit of the safe harbor match, no HCE can receive a rate of match at any level of deferral that is greater than the rate of match received by any NHCE at the same level of deferral. Unfortunately, this rule can be easily broken simply by including some very common restrictions on the discretionary and/or fixed match portion of the plan. Plans that require participants to meet a last day requirement or hours of service requirement in order to receive the discretionary match put the plan's safe harbor status into jeopardy.

For example, assume that a 401(k) plan includes a safe harbor match as well as an additional discretionary match. This plan requires participants to meet a last day requirement in order to receive the discretionary match. Charles is an NHCE who makes elective deferrals into the plan each year, including in 2012. Charles terminates employment in October 2012, and therefore is not eligible to receive a discretionary matching contribution for 2012. Janet, an HCE, also makes elective deferrals to the plan each year, including in 2012. Janet remains employed with the company for all of 2012 and receives both a safe harbor match and the discretionary match. Janet will receive a higher ratio of matching contributions since she receives the discretionary match and Charles does not. The plan is therefore in violation of the rules discussed above, preventing the plan from benefitting from the safe harbor rules and requiring it to satisfy ADP testing, even though the safe harbor match must still be made and be 100% vested.

P.S. - I should point out that I've always followed this procedure above automatically, but without ever really thinking about it - and after looking at it, I'm just wondering if I've always been doing it correctly by assuming this was the "rule." I think it is, but I'd be happy to be proven wrong...

[Tom Poje]

As I recall, when the safe harbor rules first came out, people thought you could have allocation requirements on discretionary match, but the IRS came out and said Absolutely NOT, or something like that. the only thing special about the discretionary match was the ability to apply vesting.

so I guess I don't understand the example above. if the plan has allocation requirements for the match, then it would have to be tested under ACP. My brain gears are really rusty, but as I recall you could include the safe harbor match in ACP testing as well.

Lets suppose you had an enhanced match of 100 up to 8%. that satisfies ADP, but we know that it will fail ACP. does that mean the ADP fails as well? no, it just means you have to test ACP.

I see the ERISA Outline Book says pre 2006 could have had allocation conditions (because the regs weren't clear, I guess)