Safe Harbor Plan

[Guest WMiller]

We have a safe harbor plan which provides both a non-elective contribution of 3% and a matching contribution which matches up to 6% of salary and provides 100% on the first 3% of salary deferred and 50% on the next 3% of salary deferred for a total match of 4.5%. The non-elective contribution is fully vested immediately though the matching contribution vests over 5 years. There is also a true-up at the end of the year on the matching contribution so that if an employee contributes over 6% for any period but not for the entire year, the true-up match will equal 4.5% of compensation contributed. This year, we are going to add an amendment requiring employees to be employed on the last day of the year to be eligible for the true-up, except in the case of death or disability. Does adding the last day rule, have an affect either on the plans qualification as a safe harbor plan or on whether the plan is required to perform the top heavy test?

[rcline46]

Check your final 401(k) regulations amendment to the plan. My memory says if you have a Safe Harbor plan, you cannot impose any restrictions on matching contributions (such as 1,000 hours or end of year conditions). I would consider an EOY condition for a true-up to be banned.

If your document specifies a per-period match, then normally there is no true up. If the match is an annual match (with no restrictions) then the true up is NOT an additional step, it is just part of the normal match calculation. I see no difference between a per-period match with special true up language and an annual match.

[MWeddell]

Suppose that the employer wants to comply with the 401(k) and the 401(m) safe harbor rules. You will need to make all eligible NHCEs eligible for the true-up match without regard to whether they were employed on the last day of the plan year. You may require employment on the last day of the plan year as a condition for HCEs to receive the true-up match (although one suspects that the employer will abandon the idea completely once you inform it of the restrictions).

If you want the explanation, let me continue. The match must be evaluated as a full plan year match because the true-up portion does not meet the timing requirements for safe harbor matching contributions made during the year. Evaluated based on the full year, you cannot have any NHCE have available to him or her a lower available match rate than what an HCE has available. The only way to do that is to have all NHCEs receive the true-up match.

[BG5150]

Based on the OP, it's not the match that's supposed to be the Safe Harbor.

So, you can't impose a last day rule on a non-Safe Harbor match if you are providing the 3% nonelective to everyone?

[Guest WMiller]

The match is made on a per pay period basis. The true-up is provided at the end of the year to make those employees whole who contributed greater than 6% during the year and then either were forced to stop contributing as a result of reaching the 402g limit or any other reason which caused them to stop contributions or reduce them below 6%. It allows employees to be matched as if they contributed the same percentage the whole year in order to provide the largest match to the employee but still within plan match definition of matching up to 6% of eligible compensation. Does this change anything in terms of the true-up? Also, if the plan put in this amendment to be effective as of 1/1/14 and has not yet enforced the EOY requirement, can we add another amendment noting that the EOY requirement is only for HCE's and then not change the Safe Harbor nature of the plan?

[MWeddell]

Based on the OP, it's not the match that's supposed to be the Safe Harbor.

So, you can't impose a last day rule on a non-Safe Harbor match if you are providing the 3% nonelective to everyone?

That's right. You cannot impose a last day rule on a non-safe harbor match even though the 3% nonelective is the safe harbor contribution. The rule is in Treas. Reg. Section 1.401(m)-3(d)(3) and it applies to 401(m) safe harbor plans regardless of which dollars fulfill the safe harbor requirements.

[MWeddell]

WMiller,

The explanation of the true-up match doesn't change my conclusion.

On the second part of your post, I would tell the client to contact legal counsel. The plan document and the notification to employees issued in late 2013 both say (1) the plan is 401(k) / 401(m) safe harbor and (2) all eligible employees must be employed on the last day of the plan year to get the match. Both of those statements cannot be true simultaneously, yet they are in your plan document. You already are violating your plan document, which is a potential disqualification concern. Amending the plan document now to eliminate the EOY condition for NHCEs is kind of like a "no harm, therefore no foul?" defense, but it doesn't really work legally. The technically correct answer is to make that change and do a VCP filing, but that's imposing a fair amount of extra costs on the plan sponsor.

[Guest WMiller]

Thank you for your help. One last question, while I was researching this, I noticed that the rules say that a discretionary match in a safe harbor plan is exempt from ACP testing if certain requirements are met including the match matching no more than 6% of compensation and providing a benefit to the participant of no more than 4%, Forgetting the true up question, is there anyway under the circumstance here, that there is a non-elective 3% contribution with immediate vesting and proper notice is sent, that the ACP test would not be required if it provides a benefit up to 4.5%?

[Tom Poje]

a discretionary match to be safe harbor must be capped at 4%.

one example would be a 66.67% match up to 6% of comp, which would = 4% of total comp

[MWeddell]

... is there anyway under the circumstance here, that there is a non-elective 3% contribution with immediate vesting and proper notice is sent, that the ACP test would not be required if it provides a benefit up to 4.5%?

To remain a 401(k) / 401(m) safe harbor plan, only 4% of pay may be provided as a discretionary matching contribution, but you could get the total match up to 4.5% of pay if part of the match was mandated by the plan document and not discretionary.

[Kevin C]

With a match intended to satisfy the ACP safe harbor rules being under discussion, I'll point out that the ACP safe harbor regs say you are not allowed to amend mid-year to change the match formula, which is one of the provisions that satisfies the rules of 1.401(m)-3. I read the OP as saying the amendment has not been done. Hopefully, that is the case. I also agree that adding a last day requirement for the match true-up violates the ACP safe harbor rules.

1.401(m)-3(f)Plan year requirement

(1)General rule.—

Except as provided in this paragraph (f) or in paragraph (g) of this section, a plan will fail to satisfy the requirements of section 401(m)(11), section 401(m)(12), and this section unless plan provisions that satisfy the rules of this section are adopted before the first day of that plan year and remain in effect for an entire 12-month plan year. In addition, except as provided in paragraph (h) of this section or in guidance of general applicability published in the Internal Revenue Bulletin (see §601.601(d)(2)(ii)(b) of this chapter), a plan which includes provisions that satisfy the rules of this section will not satisfy the requirements of §1.401(m)-1(b) if it is amended to change such provisions for that plan year. Moreover, if, as described in paragraph (j)(4) of this section, safe harbor matching or nonelective contributions will be made to another plan for a plan year, provisions under that other plan specifying that the safe harbor contributions will be made and providing that the contributions will be QNECs or QMACs must also be adopted before the first day of that plan year.