Safe Harbor 401(k)

[jpod]

A plan is designed with the intention of satisfying the SH Match through the basic 100%/3% + 50%/2% formula. Plan defines compensation for purposes of elective deferrals AND THE MATCH to exclude bonuses. Treas. Reg. Section 1.401(k)-3©(6)(iv) clearly says that the SH rules do not prevent you from making bonuses ineligible for elective deferrals, but then it goes on to say that each NHCE must be permitted to make elective contributions in an amount that is at least sufficient to receive the maximum amount of matching contributions. What does that mean? In the plan I've described, do you still have to test for non-discrimination under 414(s)? What if you fail?

[BG5150]

but then it goes on to say that each NHCE must be permitted to make elective contributions in an amount that is at least sufficient to receive the maximum amount of matching contributions. What does that mean?

It means that you can't cap deferrals at less than 5%.

[jpod]

Ok, the plan doesn't do that. But, do we still have to test for 414(s), and if so what if we fail? This seems like a bad plan design to me unless you have complete confidence that you won't fail 414(s). Am I missing something?

[Bird]

I guess that is what it means, but I think you need to be looking at Treas. Reg. 1.401(k)-3(b)(2). It says the SH conditions are met if you use safe harbor compensation, and I don't see any option for testing if you don't - i.e. you have to use safe harbor compensation (at least for NHCEs).

[jpod]

Bird, that's where I come out. There is a definition of "safe harbor compensation" which must be used for both the 3% nonelective formula and the match formula, and it must be a 414(s) definition.

[Bird]

Yeah...our document won't let us use anything other than safe harbor comp for SH plans, FWIW.

[Guest jmherisa]

If your plan document allows, you can use a "non safe harbor" definition of compensation for purposes of calculating the safe harbor contribution, as long as it passes the 414(s) test each and every year. If you land with a year that has failed the 414(s) test, then the approach I have seen is that a corrective amendment is adopted within 9 1/2 months following the plan year end to provide for a non-discriminatory definition of compensation that will be used in calculating the safe harbor contribution for that year (and true up contributions are calculated accordingly).

Also keep an eye out for this in your upcoming PPA plan document restatement - I know of at least one document provider that specifically addresses this issue and provides a corrective approach written in the plan for this very situation.

[jpod]

This particular employer's bonus structure may be so heavily weighted in favor of HCEs that has reaspn to be super-confident that it will pass 414(s) every year, but short of that it seems like a poor plan design to me if you are to have a safe harbor 401K plan.

[BG5150]

You could always exclude ONLY HCE bonuses.

[K2retire]

This particular employer's bonus structure may be so heavily weighted in favor of HCEs that has reaspn to be super-confident that it will pass 414(s) every year, but short of that it seems like a poor plan design to me if you are to have a safe harbor 401K plan.

But usually it is the employers who are giving bonuses primarily to NHCEs who want to use this plan design!