Safe Harbor to prior year term?

[jmartin]

Company adopted 401k plan w/ Safe Harbor effective 1/1/2018. An employee terminated in late December 2017.  Her final paycheck was paid 1/7/2018. Does the company need to make a 3% contribution on this final pay since it was paid in 2018?

[Lou S.]

Was it wages for services performed?

Was it post separation pay?

What does the Plan say about compensation?

If she has no services performed after 1/1/2018 she is probably not entitled to a contribution in this case as she likely never even becomes a participant in t he Plan. Had the Plan been in effect the prior year she would likely be entitled to the contribution as it was most likely wages earned while a participant it would just be a question of 2017 or 2018 contribution.

 

[Tom Poje]

ignoring the safe harbor issue for the moment.

suppose the person regularly deferred and had deferrals in 2017.

so now there is a final paycheck which of course shows in 2018.

most documents would indicate to include the deferral in testing in 2018 (unless they have checked the 'pain in the rear' first few weeks rule, which would seem to imply you treat everybody the same way.

so now you are including this paycheck in 2018. I would generally include it as comp earned in 2018, certainly for tax purposes the IRS treats it as such as well. so for me, if the doc says use W-2 income, I would lean toward providing the 3% on the small amount. but then I look at it as comp earned within the plan year, rather than actual date of termination. otherwise it seems rather inconsistent to include the person in ADP in 2018 even though they didn't work, but for all other purposes you don't count them. (but then I'm a bit off my rocker anyway)

[Larry Starr]

Tom, what about the fact that she has no hours in 2018 and wasn't an employee for any part of 2018?

 

[Lou S.]

16 minutes ago, Tom Poje said:

ignoring the safe harbor issue for the moment.

suppose the person regularly deferred and had deferrals in 2017.

so now there is a final paycheck which of course shows in 2018.

most documents would indicate to include the deferral in testing in 2018 (unless they have checked the 'pain in the rear' first few weeks rule, which would seem to imply you treat everybody the same way.

so now you are including this paycheck in 2018. I would generally include it as comp earned in 2018, certainly for tax purposes the IRS treats it as such as well. so for me, if the doc says use W-2 income, I would lean toward providing the 3% on the small amount. but then I look at it as comp earned within the plan year, rather than actual date of termination. otherwise it seems rather inconsistent to include the person in ADP in 2018 even though they didn't work, but for all other purposes you don't count them. (but then I'm a bit off my rocker anyway)

Your logic makes perfect sense for someone who was a participant in 2017. I mean chances are pretty good it is pay earned while  a participant and the document will define whether it is 2017 or 2018.

In this case though the employee wasn't employed on or after the effective date of the plan so how do they ever become a participant?

[Tom Poje]

the ft William document has language such as (and this is not post severance comp, that is a different check box)

15. Post Year End Compensation

[ ] Determine Compensation using Post Year End Compensation

NOTE: If selected, amounts earned during the current year and paid during the first few weeks of the next year will be included in current year Compensation.

so if you don't check the box(and I know few that don't check the box, you are already indicating to include comp even though 'no hours worked'. unless you figure if I am counting the comp I am also counting the hours as well because I am counting the W-2s that fall within the plan year.

[Tom Poje]

let's take it one step further.

let's say the person was eligible in the prior year.

you are saying if you quit the last week of December, and the paycheck shows up the following year, you never have to calculate a contribution because such people work no hours in the new year.

we need a term for that. the last week termination you get screwed rule. 

 

[Bird]

Tom, we're among the "few" that don't check the box.  Note that for this case it says you have to add back the 2018 comp and include it in 2017.  No way are we going "there."  And note that it is not specific to terminees, at least how I read it.  Thank you but NO.

[Tom Poje]

agree, unless they were to change the wording that the 'add back' applies only to terminees (I could possibly see the logic of that) who quit the last week it would be insane, especially with a plan of any size. however, now you have the problem you would need to request comp for the last week for anyone falling into that category, because usually you don't receive that until the following year.

 

so, at least for me, it falls, for all practicality, to the logic of a term date attached to the W-2 that falls within the plan year. so someone who quits Dec 27,2017 and worked 10 hours, but the paycheck shows in 2018 worked those 10 hours in '2018'. thus it makes sense to include them in ADP testing, etc. in 2018, though they didn't 'work' in 2018.  otherwise you are back to saying you don't have to give a contribution on the last paycheck earned, yes you may have had comp, but no hours, sorry, how dare you claim you should get something.

[Bird]

Well, first of all, if you are checking the box to include post year-end comp, are you doing it for all employees, term'd or not?  That's how I read it and how FTW explained it to me, and why we do NOT check the box.

As far as counting comp for a contribution or not, we don't.  They term'd in 2017, had no hours in 2018, and thus aren't entitled.  Most of our plans say you don't get paid (a distribution) until after the end of the year in which you terminate, and if we had to finagle it so they supposedly term'd in 2018, then they wouldn't get a distribution until 2019, and I can't deal with the wailing and gnashing of teeth that would entail.  I like to think I'm not a prick (others may disagree) but I'm just not worked up about someone not getting a contribution of a few bucks.

It does create some discrepancies - if that person deferred out of their last paycheck, in some theoretical sense they shouldn't have, I guess.  We just ignore the comp and the deferral and move on.

[Tom Poje]

so in other words, even tough the document says include comp in 2018, there is an exception to the rule that you can't have any allocation conditions on a safe harbor. that you actually have to perform services in 2018 (even though for personal taxes and everything else you are treated as having worked in 2018)

[Bird]

I don't know that I'd call it an exception to the rule.  They're term'd in 2017 and not active at any point in 2018.  For personal taxes they're not treated as "worked" in 2018, they're treated as "paid" in 2018.

I'm still not clear if you are saying you add back that 2018 comp to 2017 as the cited language says you should.

[Tom Poje]

And I still don't see how you can simply ignore the compensation in either year.

the person receives a W-2 in 2018.

the IRS treats the person as having 'worked' in 2018, though you say only 'paid'.

assuming the document wasn't checked, comp earned in 2017 but not paid is counted in 2018.

you are playing games saying the person 'worked' in 2017 but 'paid' in 2018 and therefore I can ignore the comp in either year, hence an exception to rule of no allocation conditions on a safe harbor. I bet if the person worked 994 hours in 2017 and worked Dec 27 and Dec 28 a total of 16 hours, you also exclude the hours and don't credit him with a year of service in 2017.

I guess this is like basketball. over and back. yes we treat the comp as being 2018, but we get to  ignore the hours in either year and the compensation for allocation purposes because it is actually 2017. since Bird and earlier post by Larry both concur on this I will refer to it as the "Larry Bird basketball exception rule"

and we will apparently disagree on the issue.

[msmith]

We would also include it as 2018 compensation. If the Employer is required to deposit a $5.00 Safe Harbor contribution - so be it.

I just wish our software could handle this accurately.

[CJ Allen]

My understanding of section 415 indicates that regular payroll or compensation that would have been paid had severance not occurred MUST be included in section 415 compensation if paid within 2 1/2 months (generally).  Unused vacation, sick, or certain payments from a non-qualified plan paid within 2 1/2 months (generally) MAY be included in section 415 compensation. 

Otherwise, the question of hours and ineligibility would seem to need to be applied to all participants where that first check in 2018 is based on compensation in "arrears" with no supporting hours.

[Tom Poje]

did a little more research, at least at the 2009 ASPPA Q and A 48-53 (a whole bunch of questions on this one!) the IRS voiced an opinion such comp is eligible

48. An employee terminates in December 2009. A final payment of salary due for services is made in January 2010. The plan does not use the “first few weeks” rule in the IRC §415 regulations to treat the January payment as made in 2009. The plan year is the calendar year. The plan includes a section 401(k) arrangement that defines compensation eligible for deferral to be section 415 compensation. Is the individual included in the 2010 ADP test, even though he terminated employment in the 2009 plan year?

Yes. Since he could defer out of the compensation paid in January 2010, he is an eligible employee under the 401(k) arrangement for the 2010 plan year. The 401(k) regulations do not treat active and former employees differently

 

50. Suppose instead that the plan is a safe harbor plan that provides the safe harbor nonelective contribution. Is this individual entitled to that contribution?

Yes. Since, as discussed in Q-1, the individual is treated as an eligible employee for 2010, he is entitled to a safe harbor contribution. However, if this individual is an HCE, and the plan does not provide the safe harbor contribution to HCEs, then no safe harbor contribution is made on his behalf. The same answer would apply to a safeharbor match if the individual made elective deferrals out of the 2010 compensation.

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

Robert Kaplan gave an ASPPA presentation the following year and included this stuff in his talk

http://www.asppa-net.org/Portals/2/Defining Compensation in Qualified Plans.pdf