less match to HCEs in a SHM plan

[AlbanyConsultant]

We have a client who wants to explore a SH match. Their issue is that they've got a bunch of employees who earn $300K+ who will defer the max, and they don't want to be on the hook to give each one a $10,600 match - that's just not in the budget.

Obviously, we can exclude the HCEs from getting the SH contribution altogether. But is there a way to give them a discretionary match that doesn't fail coverage and/or ACP? Then they can decide to match all those HCEs at, say, 100% of 2% instead of at 100% of 4%. It seems to still preserve the safe harbor because the NHCEs will still have equal or better match rates and we're still under 4%...

[austin3515]

I asked this very question of Corbel and they said "yes." Their irrefutable logic? If you can give them nothing, surely you can give them something that is less than the full match. I don't know if you are using the Corbel PT formatted VS, where you can make the SH Match discretionary for the HCE's. That was a sweet little addition that made me quite happy... We're using that as a "default" for our closely held/owner is the only HCE SH Match plans...

[Tom Poje]

the regs simply say
all nhce eligible to defer must receive the safe harbor
that HCEs can't receive at a higher rate
so, provided it can be accomplished in the document that should be possible.

years ago I sat in on a pre- IRS Q and A, and asked the following:
for the SHNEC does the plan have to specify 3%, and the particular IRS individual gave a somewhat puzzled look, as if to say, everyone knows it is 3%, then grabbing a copy of the regs he said, something to the effect, hmmm, it does say "at least 3%"

I vaguely recall safe harbor documents were coded "equal to 3%" but now many say "at least 3%" or "not less than x%< the minimum being 3%"

[austin3515]

The regs can be quite helpful sometimes, I don't know why I am always so surprised

(b) Safe harbor nonelective contribution requirement

(1) General rule. The safe harbor nonelective contribution requirement of this paragraph is satisfied if, under the terms of the plan, the employer is required to make a qualified nonelective contribution on behalf of each eligible NHCE equal to at least 3% of the employee's safe harbor compensation.

© Safe harbor matching contribution requirement

(1) In general. The safe harbor matching contribution requirement of this paragraph © is satisfied if, under the plan, qualified matching contributions are made on behalf of each eligible NHCE in an amount determined under the basic matching formula of section 401(k)(12)(B)(i)(I), as described in paragraph ©(2) of this section, or under an enhanced matching formula of section 401(k)(12)(B)(i)(II), as described in paragraph ©(3) of this section.

(2) Basic matching formula. Under the basic matching formula, each eligible NHCE receives qualified matching contributions in an amount equal to the sum of—

(i) 100% of the amount of the employee's elective contributions that do not exceed 3% of the employee's safe harbor compensation; and

(ii) 50% of the amount of the employee's elective contributions that exceed 3% of the employee's safe harbor compensation but that do not exceed 5% of the employee's safe harbor compensation.

(3) Enhanced matching formula. Under an enhanced matching formula, each eligible NHCE receives a matching contribution under a formula that, at any rate of elective contributions by the employee, provides an aggregate amount of qualified matching contributions at least equal to the aggregate amount of qualified matching contributions that would have been provided under the basic matching formula of paragraph ©(2) of this section. In addition, under an enhanced matching formula, the ratio of matching contributions on behalf of an employee under the plan for a plan year to the employee's elective contributions may not increase as the amount of an employee's elective contributions increases.

(4) Limitation on HCE matching contributions. The safe harbor matching contribution requirement of this paragraph © is not satisfied if the ratio of matching contributions made on account of an HCE's elective contributions under the cash or deferred arrangement for a plan year to those elective contributions is greater than [Austin3515: i.e., it could be less than, including zero] the ratio of matching contributions to elective contributions that would apply with respect to any eligible NHCE with elective contributions at the same percentage of safe harbor compensation.

[AlbanyConsultant]

We're on Datair's documents; I don't think their prototype-style volume submitter document gives that much flexibility, but maybe we can do a snap-on amendment. We can definitely exclude them entirely, but I don't see a reduced amount as an option. I'll ask them.

Thanks!

[Tom Poje]

Austin:

in other words if your document says at least 3% you could allocate a SHNEC greater than 3% if you desired.

(why you would want to do that is a different issue)

but it sounds like it has been drilled into your brain that the SHNEC was always only 3%.

[Gadgetfreak]

What do you think about giving the HCEs no SH match but giving Keys the SH match (along with NHCEs)? I have a client that wants to do that.

[Tom Poje]

Again, I think it boils down to your document.

we have one that provides the following options.
choice iii sounds like the opposite of what you want, excluding someone who is both key and hce. (therefore nonkey HCEs would be receiving so 'logically' you could discriminate amongst HCEs in other ways.
but I see option iv gives a chance to describe something other

a. Exclusions. For purposes of safe harbor contributions, the term "Eligible Employee" shall not include
i. [ ] No exclusions.
ii. [ ] Participants who are Highly Compensated Employees
iii. [ ] Participants who are Key Employees and Highly Compensated Employees
iv. [ ] Other exclusions: _________________

[shERPA]

So assume a plan uses an enhanced 100%/4% SH match. It excludes HCEs from the SH match, and further provides for a discretionary match and excludes NHCEs from this discretionary match. Then as long as the HCE match is at some rate not greater than 100%, and further assuming HCE deferrals matched are capped at some level not to exceed 4%, this should comply with the regs, and in doing so the plan keeps its top heavy exemption? And the HCE match could be subject to vesting?

Does the document itself have to limit the HCE match not to exceed 100%/4%? Doesn't appear the reg requires such.