Safe Harbor to HCEs

[Gilmore]

Is it permissible for a safe harbor 401(k) plan (basic match) to cap the amount of safe harbor match received by an HCE?

I know that the plan can provide that HCEs are excluded from receiving the safe harbor match, or that there can be allocation restrictions for HCEs, but is it permissible to put a dollar limit on the safe harbor match to HCEs?

Thanks.

[Mike Preston]

Yes.

[Gilmore]

Ok, thanks Mike. Would you have a cite, or Q&A that might address this? Unfortunately my document provider does not agree. They are telling me that the HCEs can be excluded or required to meet allocation requirements, but if they are allowed to receive the safe harbor match at all, it must be the full match.

I have a client with a traditional 401(k) plan in which the current match is capped at $5000. They are considering going to a safe harbor but are concerned about the expense. I thought an alternative might be to continue to cap the match at $5000 for the HCEs only, which would reduce the overall cost of the safe harbor match, but not totally exclude the HCE from a benefit they are used to receiving.

[K2retire]

You could also exclude the HCEs from the SH Match but give them a fixed match that is capped at that amount.

[Tom Poje]

An employer is only required to provide a safe harbor to each NHCE who is eligible to participate in the plan. [i.R.C. §§ 401(k)(12)(B) and ©.

thus, in the Code, as long as the NHCEs get the safe harbor you could arguably give the HCEs something less (assuming your document can handle that)

the regs are similar

To satisfy the safe harbor matching requirement, each eligible NHCE must receive a qualified matching contribution satisfying either the basic match or enhanced match. In addition, this requirement is not satisfied if the ratio of matching contributions made on behalf of any HCE is greater than the ratio of matching contributions made to any eligible NHCE at the same percentage of safe harbor compensation. [Treas. Reg. § 1.401(k)-3©(1), § 1.401(k)-3©(4)] Thus it appears to be possible to write a document to contain such a formula.

so providing the HCEs are receiving at a lesser rate the regs seem to say you can do that (again, document permitting)

K2Retire is quite possibly referencing a comment made at an ASPPA conference
Assuming that the rate of match for HCEs does not exceed that of the NHCEs (and other such safe harbor requirements), the formula should be possible. [ASPPA Conference 2013 Q and A #22]

in light if what the Code says and the regs say, this seems valid, but then any comment made at such Q and A doesn't necessarily represent an actual Treasury position, but at least in this case seems valid to me, but then consider the source (me) expressing that opinion and you might consider that a strike against it

............

again, I think it boils down to 'does your document permit it'.

for example, most of the original documents were hard wired at "3 % safe harbor nonelective" but now many say "at least 3%.." because that is permitted under the regs.

so

can you do it? certainly looks like it

does your document allow that? - hmmmm

[Belgarath]

Agreed. Our document language is flexible in this regard - allows exclusion of HCE's, but as part of that exclusion, allows a "discretionary" safe harbor for the HCE's - only restriction being that it cannot exceed the safe harbor being provided to the NHCE's.

A nice feature.

[AdKu]

If I have different class of HCEs.

Hourly HCEs are allowed to defer.

Can these hourly HCEs be excluded from employer contribution including Safe Harbor Non-elective?

Or at least provide them a lower percentage of Safe Harbor so that the plan passes all the compliance testing?

Does the plan doc. needs to have the exclusion language stating that only hourly HCEs are excluded?

Or can it be implemented as one of the many permissible testing techniques taking the fact the regulation doesn't necessary require provide safe harbor contribution to HCEs?

[Mike Preston]

Which bite of the apple would you like a response to?

[AdKu]

Does the plan doc. needs to have the exclusion language stating that only hourly HCEs are excluded?

[Mike Preston]

The doc requires the language because SH contributions can not be purely elective.

[AdKu]

 

Tom you stated, 

    "thus, in the Code, as long as the NHCEs get the safe harbor you could arguably give the HCEs something less (assuming your document can handle that) ....

        for example, most of the original documents were hard wired at "3 % safe harbor nonelective" but now many say "at least 3%.." because that is permitted under the regs." 

Belgarath you stated, 

        "Our document language is flexible in this regard - allows exclusion of HCE's, but as part of that exclusion, allows a "discretionary" safe harbor for the HCE's..."  

Can anyone help me reviewing whether the below plan doc language gives the flexibility not to provide the 3% Safe Harbor Nonelective (or provide at a lesser rate than 3% of comp) to owner HCEs ?

____________________________________________

 

17.1     Safe Harbor Nonelective Features

 

Note: The contribution requirements to satisfy both the QACA and non-QACA safe harbors are identical. Therefore, the provisions of this Section apply to both QACA Safe Harbor Nonelective Contributions and Non-QACA Safe Harbor Nonelective Contributions.

 

a.     Safe Harbor Nonelective Formula. Safe Harbor Nonelective Contribution formula is:

i.      ý    Discretionary: The Employer may amend the Plan annually to make a Safe Harbor Nonelective Contribution of at least 3% of Compensation.

ii.     ¨    Required annual contribution equal to ____________________% (≥ 3%) of Compensation

iii.    ¨    Other plan. The Employer will make a Safe Harbor Nonelective Contribution equal to or greater than 3% of Compensation to another defined contribution plan maintained by the Employer: (specify the name of the other plan) ___________________________________ 

Note: The other defined contribution plan must have the same plan year as the Plan. The Employee group eligible to receive the Safe Harbor Nonelective Contribution under the other plan should correspond to Covered Employees for 401(k) Contribution purposes under the Plan. The Safe Harbor Nonelective Contribution made to the other plan must satisfy the requirements of Code Section 401(k)(12)(C) (as provided in the Plan with respect to Non-QACA Safe Harbor Nonelective Contributions) or Code Section 401(k)(13)(D) (as provided in the Plan with respect to QACA Safe Harbor Nonelective Contributions).

 

b.     Contribution Period. The Contribution Period for Safe Harbor Nonelective Contributions is the Plan Year.

[Belgarath]

Based purely upon what you are showing here, I'd say no, But there could be a whole lot of other "stuff" in your document somewhere that would permit it. What you have here is a safe harbor "maybe" option, but in this section as shown, there is no option to reduce or exclude the HC. I would check the rest of your document carefully to see if what you are looking for is available.

[Tom Poje]

it is a maybe

for example, the ft William document (in addition to excluding HCEs entirely from safe harbor) has the following

d.     Allocation requirements for Highly Compensated Employees

i.      [  ]  Require service for Highly Compensated Employees to receive a safe harbor contribution. Hours of Service required in the applicable Plan Year for Highly Compensated Employees to receive a safe harbor contribution:            

ii.    [  ]   Require employment on the last day of Plan Year for Highly Compensated Employees to receive a safe harbor contribution     

 

while it appears the line item for d(i) is intended to be # of hours, I wonder if one could enter 0 hours and contribution capped at 3% or something similar

 

I really don't know, maybe that is a stretch  

[AdKu]

Thank you Belgarath & Tom,

      I'll carefully review the hard copy plan doc as well as check the plan doc software itself  just in case needs to be marked to trigger some additional options to allow HCE exclusions.

 

[AdKu]

 

Closely reading the plan doc., I have come across the below Plan Provision (highlighted in yellow). Based on this section 

Can I exclude all HCEs from receiving Safe Harbor Nonelective ?

Eligibility for all contribution type is age 21 and 1 year of service (1,000 hours). And all employees are covered employee except union employee and non-resident alien (there is none in the plan). Plan entry is 1/1 & 7/1  coinciding with or next following satisfaction of eligibility

Service crediting method is Hours of service methods (for eligibility 1000 hours first 12 months then switch to plan year)

Language from the Plan Doc.

22.2     Application of ADP/ACP Test

 

a.     ADP Testing Method. Nondiscrimination requirements for 401(k) Contributions will be satisfied:

 

i.      ¨    N/A. Nondiscrimination requirements do not apply because HCEs do not make 401(k) Contributions

 

ii.     ¨    Current year testing method (no Safe Harbor Contributions)

 

iii.    ¨    Prior year testing method. If this is the first Plan Year to provide for the CODA, prior year testing method is applied using:

 

A.    ¨    N/A. This is not the first Plan Year to provide for the CODA

 

B.    ¨    3% contribution assumption for non-HCEs

 

C.    ¨    Actual deferral percentages of non-HCEs for first Plan Year

 

iv.    ý    Safe harbor applies for some or all Eligible Employees.

A.    ý    ADP testing applies because

 (i) not all Employees eligible to make 401(k) Contributions are eligible for Safe Harbor Contributions (e.g., non-bargained employees receive Safe Harbor Contributions and bargained employees do not OR different age and service requirements apply for Safe Harbor Contributions than for 401(k) Contributions) or

 

 

(ii) the discretionary Safe Harbor Nonelective Contribution option was selected. (current year testing applies.)

 

b.     ADP Test Correction – Roth Contributions. If Roth 401(k) Contributions are permitted under the Plan, excess contributions attributable to 401(k) Contributions will be allocated and distributed as follows:

 

i.      ý    First from Pre-Tax 401(k) Contributions, then from Roth 401(k) Contributions

 

ii.     ¨    First from Roth 401(k) Contributions, then from Pre-Tax 401(k) Contributions

 

iii.    ¨    Distribute in ratio that Participant's Pre-Tax and Roth 401(k) Contributions bear to Participant's total 401(k) Contributions for the Plan Year

 

 

Language from the SPD

Safe Harbor Nonelective Contributions

 

Once you have met the requirements to participate in the Plan with respect to Safe Harbor Nonelective

 

Contributions, as described in ELIGIBILITY TO PARTICIPATE: ELIGIBILITY REQUIREMENTS above, you may receive Safe Harbor Nonelective Contributions for a Plan Year if you are a Covered Employee at any time during that Plan Year.

 

If you are eligible, each Plan Year your Employer will determine whether to make a Safe Harbor Nonelective Contribution to your Account of at least 3% of your Compensation for the Plan Year.

 

Your Employer will provide notice each year of its obligation to make Safe Harbor Nonelective Contributions to your Account and of the other benefits provided under the Plan. If your Employer makes Safe Harbor

 

Nonelective Contributions to the Accounts of all eligible employees and also provides the notice described above, it does not have to apply certain discrimination rules that could limit the 401(k) Contributions made by Highly Compensated Employees.

[Tom Poje]

your original posting (which you deleted) had the box checked that sounded like 'maybe safe harbor language' ...the plan might be amended to safe harbor no later than 30 days before plan year end. but that would have required an initial 'maybe' safe harbor notice as well.

and (ii) of the highlighted text could imply that as well.

item (I) would seem to imply that some NHCEs are not eligible for the safe harbor...e.g. immediate eligible to defer but one year wait for safe harbor -

that would require ADP testing for the otherwise excludables, but since there are probably no HCEs in that group that shouldn't be a problem.

but I saw no checkbox in what you posted to indicate one way or the other whether HCEs could be excluded. maybe it is buried in another spot. I would expect a document to have that item