Reverse discrimination in safe harbor plan

[Guest JPIngold]

I've been asked something I've never been asked before ... "can we limit the employer contributions for the HCE's?"

The client is a medical facility that is owned by investors (none of which are employed by the facility). They have two HCE's who want to max their 401(k) deferrals. Rest of the employees don't defer well, so several years ago we adopted safe harbor 401(k) plan with basic match.

They are looking to reduce the amount of the match for the two HCE's for budgetary purposes. My off-the-cuff thought is as follows:

• amend plan for 2015 to exclude HCE's from basic match
• include a discretionary match that only the HCE's are eligible to receive
• automatically satisfy ADP test due to basic match for HNCE's
• need to perform ACP test (which will hopefully pass because the formula for HCE's is not as beneficial as safe harbor basic match --- essentially, I will have to tell them what level of match will satisfy ACP and that will be their discretionary match)

The plan is not top-heavy, so we don't have that issue (as we wouldn't meet top-heavy exemption for safe harbor plans). I won't have 410(b) issues as the two matching contributions are aggregated to run that test.

Am I not thinking of something?

Thanks.

[Lou S.]

I think you've covered it pretty well. Remember you can almost always discriminate against HCEs.

[Guest JPIngold]

Thanks Lou.

It is interesting that with the document I use, if I select the option to exclude HCE's from the safe harbor contribution, I get language under Eligible Employee that states that for any year in which the ADP safe harbor contribution will be made for NHCE's, the Employer MAY make a discretionary ADP safe harbor contribution for all HCE's (who would have been eligible for the safe harbor contribution but for the HCE exclusion as long as the discretionary contribution is uniform for all HCE's and doesn't exceed the amount they would have received under the safe harbor contribution for the NHCE's.

With that language in place, it almost seems like I wouldn't need to put in a provision for a discretionary matching contribution subject to ACP testing. Is that wishful thinking on my part???