Safe Harbor NEC - odd formula

[401QUE]

I have a plan sponsor client that wishes to make their Safe Harbor Non-Elective Contribution using the following formula: 4.5% of regular comp, plus 2.25% of bonus compensation. The plan document vendor has them on a volume submitter plan - not sure if relevant - and they are reluctant to provide their "blessing" of the formula, which would be in the addendum as a write-in fixed formula, rather than a modification to the plan's definition of comp for the SH NEC. A rough calculation of the 414(s) Compensation Test results in the HCEs with a lower average compensation percentage than Non-HCEs, however I am not so sure it passes the prerequisite "Reasonableness Test." If it was okay, does this formula need to be cross-tested?

Unfortunately, I can't quite get anyone to give me a straightforward answer on this. I am leaning towards suggesting to the client that they simply exclude or include 100% of bonus and be done with it, rather than trying to thread the needle. Thanks!

[Guest jmherisa]

I would say there are too many risks and red flags in that plan design. First in the document, the modification could take away its volume submitter status and it would need to be treated as an individually designed plan - submitted for an IRS determination letter, etc.. Second in the 414(s) compensation ratio test - just because it looks okay with current demographics, it could blow up in any particular year. Third you might check to see if there is an upper limit on what rate can be set for the safe harbor nonelective - typically it's 3% and I have never seen it above 5 or 6%. Which is applied to the plan's definition of compensation for that source; it should not have different rates applied to different pieces of compensation. Why don't you design the plan with a 3% safe harbor on a safe harbor definition of compensation (including the bonus), and a new comparability PS - each participant in a different allocation group - this should help to fill in any gaps of what they want to contribute to each person for any particular year. They can certainly provide immediate vesting and no accrual requirements on the PS just like the safe harbor piece will have.

[401QUE]

Unfortunately, the VS document they are on does not allow for anything more than Pro Rata and Integrated allocation methods. I believe the SH NEC upper limit is 25% - at least that's the range given in the plan doc..

I appreciate your comments and suggestions, JMH!

[BG5150]

You can't integrate SH.