Discretionary match in Safe Harbor 401(k) Plan

[Dougsbpc]

We know it is easy to have a safe harbor 401(k) plan with SHNEC only to non-keys. Then in a good year a 3% NEC can be given just to the keys resulting in all participants getting a 3% contribution.

Does a safe harbor match work the same way? In other words can just non-keys get a safe harbor match and then in a good year keys only get a discretionary match?

Our document seems to allow this.

Thanks.

[Tom Poje]

Q and A 21 at the 2013 ASPPA Conference

If plan has 2 or more matching formulas, one satisfies ADP safe harbor are all formulas looked at together to see if ACP safe harbor is satisfied?

proposed answer: ...If both formulas are discretionary and could be implemented in a way that may not satisfy safe harbor, then the formulas need to meet safe harbor on their own.

IRS response: the second discretionary formula that would not meet safe harbor independently would need to meet ACP testing.

so my "guess" on different possibilities are the following:

based on the IRS comment I would say no because the discretionary wouldn't meet safe harbor independently.

however, as I recall, you could use up to 4% of the ADP safe harbor match in the ACP test so even a discretionary match to HCEs probably wouldn't be a problem.

You would lose top-heavy free.

I don't believe coverage is a problem, because you look at all who could receive a match in any way shape or form.

[Belgarath]

Not sure - are you talking about a "discretionary" match that does not exceed the regular safe harbor matching formula?

If so, then yes, it can be done. SunGard's new pre-approved PPA docs have a specific election in the adoption agreement that allows you to exclude the HC's from the Safe Harbor contribution, while allowing a "discretionary" safe harbor contribution, as long as that amount doesn't exceed the safe harbor contribution provided to the NHCE's. And you don't lose your top heavy exemption solely by making this "discretionary" safe harbor contribution.

[Dougsbpc]

Thanks for all the replies.

Yes that is exactly right. In this case, the document allows key HCEs not to receive the safe harbor match. It also appears the document allows for a discretionary match where we can just provide the discretionary match to the key HCEs who are not getting a safe harbor match.

If/when a discretionary match is provided, it would not exceed what would have otherwise been a safe harbor match.

Bottom line - the employer would just like to have the flexibility for owners/key employees to not receive a match during a bad economic year (if that ever even happens for them).