Employer Won't Safe Harbor Plan: Other Options?

[401kquestion]

I am one of two HCE's in a 50 person company (the other HCE is our owner). I work in business development and have made a lot of money over the last several years. However, our owner, and his outside financial advisor (who he defers to on matters like this) simply will not Safe Harbor our 401K plan. The problem is that most non HCE's don't contribute. For the last four years, we have failed the ADP test and I've gotten considerable refunds at the end of the year (both from what I have contributed and what my employer's matching contribution).

I was just told by my owner's financial advisor that since we failed the ADP test again this year, I will be capped at contributing $10,000 this year (instead of the max of $18,000) and the employer match will be capped at $9,000.

My owner's refusal to safe harbor my plan is annoying and I'm at the point where I am considering working for an employer where I won't have this issue. I do very well there (I've made between $300-$400K over the past few years) and wouldn't make as much elsewhere, so wanted to get outside advice on what else I should do here? I max out both my individual IRA and my wife's IRA ($5,500 each year) and I also contribute healthily to taxable mutual fund and stock accounts (and also to a muni bond fund as well).

[movedon]

I've never heard safe harbor used as a verb and I like it .

So due to refunds you're missing out on $7,500 in deferrals this year and some amount of match, which ostensibly translates into a few grand in tax cost to you. How much of a pay cut would you take if you left? What about intangibles like your overall happiness, etc.?

Barring some other issues, I can't imagine why you would be that worried about the 401(k) plan - these amounts seem trivial compared to your overall compensation. You could always go to your boss and show him a little spreadsheet illustrating the tax cost to you of not being able to max out and ask him to give you a comparable bonus outside the plan to make you feel better about it. 401(k) plans are nice, but don't blow the value of that tax deferral out of proportion.

Also, unless your new employer is going to be you, there's no guarantee you won't have a similar problem in the future. A plan that is safe harbor this year may not be next year.

[ESOP Guy]

You might want to see if the boss and financial adviser and you can have a talk and see what is their objections to a Safe Harbor plan. In these situations they don't want to vest people or think total cost will go up.

However since a type of Safe Harbor plan is one that is a fully vested match and if most of the other employees don't contribute the total cost might not go up. It sounds like the current match formula is fair rich if you are getting the refunds you are talking about

Maybe a 3 way conversation will help. Otherwise I am with lippy it just doesn't sound like enough of an issue to leave a well paying job over.

One last thing does your company have a health insurance option with an HSA? If so, max out the HSA and pay the medical expenses currently out of pocket. The HSA in effect becomes a tax deferred savings method when you do that.

[david rigby]

My owner's refusal to safe harbor my plan ...

No matter what, don't forget, it's not your plan.

[Tom Poje]

it was indicated this is a 50 person plan, so lets say all the NHCEs make 30,000. a 3% safe harbor would costs 45,000 (900 * 50). That is probably a minimum amount. so the company has a choice between spending 45,000 to fund the plan or having refunds, which I'm guessing are easily under that amount. that is what it usually boils down to - simply the cost involved. plus under the safe harbor rules, someone who is in the plan might work 1 month and quit, yet you still have to provide the 3% (granted the comp for one month is small, but you still have to fund it. a lot of owners grumble about having to give someone who quit additional $)

[jpod]

I think someone suggested that the match already appears to be at least close to as generous as a SH Match, so quite possibly the NHCEs' behavior won't change just because of the immediate vesting and receipt of the annual SH notice. Of course, in the final analysis they would be gambling with the owner's money, not 401kquestion's money.

[hr for me]

And depending on how many currently contribute vs how many would with a safe harbor match on the nonelective 3%, you could be looking at larger administrative fees -- especially terminated employees who leave very small balances in the plan over time.

What is the current match formula? If they go with participating and the safe harbor match formula versus the straight 3%, how much more would that increase the cost to the company? You should be able to use the current average deferral percentage to see if those participating under the minimum safe harbor match formula. If they have a bad match right now, the cost would be higher than if you already have a rich match. In the case of a rich match, have you looked at better communication, auto-enrollment with increasing %s each year, etc to increase participation by NHCEs? Of course that in the end will also increase the employer cost of match.

That said, I agree with the others that this is not something I would leave the employer over, especially if other compensation is better than you can find elsewhere. What you are losing is the pretax benefit of that money. You should probably sit down and see what that difference truly is before jumping ship.

Unfortunately there are a lot of tax deductions that get lost as you make more money and this is one of them. I can name several more as I am doing my taxes today....but I wouldn't give up the income to get the deduction!

[Lou S.]

Have you considered making the maximum non-deductible IRA contribution each year for yourself (and your spouse if you are married) and immediately converting to ROTH IRA?

As for why your employer won't "safe Harbor the plan" - it is probably a cost issue. I to like the use of safe harbor as a verb.

And yeah the the tax savings on $8000 sounds minimal compared to the compensation you're currently making. Sure it's annoying but a lot of folks would kill for your problems.

[GMK]

I do not favor transitioning nouns and adjectives into verbs. Granted, it cutifies the language, but sometimes it sounds a bit affectationed and in other cases, it can imprecise the meaning. Maybe I'm just too old to be todayed, but in the future ... sorry, but going forward, I will try to keep up.

[John Feldt ERPA CPC QPA]

GMK: Yes, very well articulationed.

[My 2 cents]

I do not favor transitioning nouns and adjectives into verbs. Granted, it cutifies the language, but sometimes it sounds a bit affectationed and in other cases, it can imprecise the meaning. Maybe I'm just too old to be todayed, but in the future ... sorry, but going forward, I will try to keep up.

One day, at my local library, I idly looked at a copy of the Oxford English Dictionary for the first time (the volume containing words beginning with "P"). I was surprised to see the word "pinafore" (OK, the OED was completed a long time ago) used as a noun (its normal usage meaning something like a knee to shoulders apron for children to wear to keep their clothes clean), an adjective ("the pinafored children went out to play"), a verb ("the governess pinafored the children and sent them outside"), and, I think, somehow as an adverb but I cannot remember how. You have to love the mutability of the English language! Still, there's something a bit too jargonish in using "safe harbor" as a verb. Just because it can be done does not mean that it should.

[GMK]

^Maybe we should partner in an effort to congress a law that outlaws such silliness.

(Just kidding. We all know that "safe harbor" has just been verbitized forever.)

[401kquestion]

Thanks to everybody for the feedback. The main reasons why we won't move to a Safe Harbor plan is that only two employees are currently affected by failing the ADP Test (me and the CEO) and our advisor (he's basically like our CFO) doesn't see it as a priority since our owner is in his 70s (I'm in my early 40s). Thus, I don't see this changing any time soon.

I am maxing out on individual IRA's each year for my wife and I. Could convert to Roth's but wondering if it would make sense? I've read about variable annuities I could self fund to get some tax advantaged status (Vanguard has very low cost ones) or I could just continue contributing to after tax index fund accounts as I have been doing. Any other thoughts?

[Lou S.]

I think you are asking tax and investment questions that are a bit beyond t he scope of this board. Not that they aren't great questions just that we don't really know your whole financial picture.

If it was me I'd find a reputable Certified Financial Planner who had both investment and tax background who charges an hourly rate, not a a commission to review your whole financial situation and make some recommendations or plans.

[Kevin C]

Going a bit outside the box... You didn't mention 401(k) for your wife. Could she work somewhere that has a 401(k)? Once she becomes eligible, she could defer $18,000 on as little as $20,000 of compensation. That helps with your savings and could be a huge help to the testing for her employer. As long as she doesn't have more than 5% attributed ownership, she would be an NHCE deferring 90% of pay.

[Mike Preston]

In the OP's situation I would recommend that he encourage the for-all-intents-and-purposes-CFO to find a competent ERISA advisor that specializes in designing plans that are intended to maximize benefits for small groups of participants. From the sounds of it, a targeted plan might enable a tax deferred allocation in 2015 of the maximum allowed ($53,000 less the allowable 401(k) and match) at an employee cost that might be as low as $2,000. Best of all this can be hung on the existing plan and you wouldn't even need a new plan.

I seem to recall that the preamble to the 204(h)/4980F PPA regulations changed "204(h) notice" to an action rather than a singular noun. Taking just a snippet from the preamble: "This Treasury decision amends the regulations under section 4980F of the Code to reflect provisions in PPA ’06. Section 502© of PPA ’06 amended section 204(h) of ERISA and section 4980F of the Code to require that section 204(h) notice be provided to any employer that has an obligation to contribute to the plan." Have you been 204(h) noticed lately?

[jpod]

Agree 100% with Mr. Preston about the creative thinking which could be employed here, but evidently the facts are that the owner is in his 70s and thinking about his exit strategy and retiring to a beach somewhere and really has no interest in spending the time or the money to make his highly paid employee just a little bit happier.

[Lou S.]

Maybe high paid employee can be his exit strategy by buying the business. Then he could safe harbor the plan himself.

[ESOP Guy]

Maybe high paid employee can be his exit strategy by buying the business.

And for some reason I think an ESOP could help here!

[401king]

I am maxing out on individual IRA's each year for my wife and I. Could convert to Roth's but wondering if it would make sense? I've read about variable annuities I could self fund to get some tax advantaged status (Vanguard has very low cost ones) or I could just continue contributing to after tax index fund accounts as I have been doing. Any other thoughts?

Presumably you're each contributing after-tax. You should definitely be converting these to Roth, assuming you don't' have some older IRAs lying around.

And for what it's worth, saving $10k and getting a nearly 100% Match - $19k altogether, is far better than some scenarios I have seen.

Just try to put yourself in their shoes - for you to save an additional $8000 I may cost them far more than $8000. And your net gain from saving $8000? About $4000. The math just doesnt check out.

[mbozek]

Ask your employer to establish a non qualified deferred comp plan under IRC 409A for you which would allow you to defer $7500+ on a pre tax basis. Fund earnings would not be taxed until distribution. However the account would be subject to claims of employer's creditors. Employer would have to pay to draft a plan.