Safe Harbor Contribution in ESOP plan instead of 401(k)

[Rai401k]

We have a client that currently has a 401(k) plan with a 3% safe harbor with us.

They are interested in setting up a separate ESOP Plan. Unfortunately we do not administer ESOP plans so they will be setting up the ESOP plan with a different TPA effective 1/1/2014 and leaving the 401k with us.

Here's the question, they want to fund the 3% safe harbor non-elective contribution to the ESOP plan instead of the 401(k) (starting 2014 and going forward). Is this permissible?? and if so will this still exclude the 401(k) from non-discrimination testing and count towards a top heavy contribution for the 401k if applicable?

[Lou S.]

The 3% safe-harbor can be made to another plan, even an ESOP as I understand it. I think there are some extra consideration you need to look at when the ESOP is leverages to make sure you are releasing at least 3% and that piece has to be 100% vested.

You can use the contribution to satisfy T-H and if 3% is on full year 415 comp you already satisfy TH even if additional contrib is made. You just want the 401(k) to reference how T-H is being statisfied because you have multilple plans and the 401(k) needs to reference how it is compying with TH.

[ESOP Guy]

It can be done and we have done it. You need to make sure the document are written so reflect this fact. Since you are the 401(k) provider you will want to make sure you plan is clear the S.H. non-elective isn't also being made to the 401(k). It can count towards the T.H. and non-discrimination rules.