Safe harbor match plus discretionary match

[Belgarath]

This subject always gives me fits. Suppose a plan is utilizing a basic safe harbor match, and in addition wants to provide a discretionary 100%  match on deferrals in excess of 5% up to no more than 8%. So 8% deferral gets you a 7% match.

Since deferrals in excess of 6% are being matched, it blows the ACP safe harbor. But do you have to test the ENTIRE match for ACP, or just the match in excess of 4%? I've heard and read different opinions, and it seems that 1.401(m)-2(a)(5)(iv) allows you to choose? The subject ain't as clear as I would like. Would be interested in any opinions. Thanks. (P.S. - this is actually a 403(b) plan, but I put this question in the 401(k) forum, since this is where it always seems to come up)

[Tom Poje]

well, that reference says if plan satisfies ADP safe harbor using a match then you could exclude 4%. you indicated your plan satisfies that condition.

so my understanding is:

you are already using the safe harbor match in the ADP, you are permitted to ignore 4% of that in the ACP test if you have to run that test. or put another way, even though you are using the match to satisfy the ADP test we will let you use all of it in the ACP test if you have to test, but what the heck, we will let you ignore the first 4% if you feel like it.

this is different that if you had a 3% SHNEC . now you no longer are using a safe harbor match to satisfy the ADP, so you can't exclude any match in the ACP (e.g. if you had a discretionary up to 8%)

I don't think you look at it and say "the discretionary match is only on amounts above 5%" and therefore the combined match totally fails ACP so you can't ignore any of the match, because the ADP safe harbor is still satisfied, and that is all the reg seems to say is required.

but then, remember, I am half out of my mind at times...

[Belgarath]

Well put. So if you are a halfwit to start with, and you are half out of your mind, that makes you a quarter-wit, which is the technical term for politician. I wouldn't admit it if I were you...

Thanks for the response, it is helpful.

[Tom Poje]

the line I remember best from an old radio program

 

I was born ignorant, and I have been losing ground ever since

[Belgarath]

I prefer the opposite approach, "Once I thought I was wrong, but I was mistaken." No, wait a minute, that's my wife...

[Luke Bailey]

Belgarath, the provision you cite, 1.401(m)-2(a)(5)(iv) (second sentence), seems clearly to give you that choice if you (a) satisfy ADP safe harbor, but (b) don't satisfy the ACP safe harbor, e.g. as in your example because you match above 6%. But two questions: First, wouldn't testing just the top part of the match make it harder to pass ACP, since that part of the match would be more likely to be captured by HCEs? Second, in the situation you posit, are you sure you satisfy the ADP safe harbor, given the second sentence of 1.401(k)-3(c)(3)? Say I defer 8%. On my top two 1% tranches in the first 5 percentage points of my deferral, my match rate is 50%. On the final 6th, 7th, and 8th percentage point tranches, it's 100%. Is that OK under 1.401(k)-3(c)(3)'s second sentence? I'm not sure. Maybe, if you are only looking, for purposes of 1.401(k)-3(c)(3) at the part of the match you are using to show you satisfy the ADP safe harbor. But that interpretation is not the more literal interpretation of the sentence, I think. Maybe more research (or sounder reasoning than mine) can resolve. Just posing some questions.

[Will.I.Am]

I have a question. The Erisa Handbook tells you that you need to combine the match under both the safe harbor formula (basic formula; 100% of first 3%, 50% of next 2%) and the discretionary match to see if it meets the ACP safe harbor requirements. I don't really understand why. Basically I want to know if someone defers 5% and a plan does the basic safe harbor match formula but also wants to do a 100% of the first 4% discretionary match, would ACP testing have to be done or does it meet the ACP Safe Harbor Requirements?

I guess my question is do you apply the 6% rule (matching contributions may not be made with respect to elective deferrals in excess of 6% of comp) independently to the discretionary match, or do you have to combine the safe harbor and the discretionary together and then apply the 6% rule?

[Luke Bailey]

Will.I.Am, I think what is meant by combining the safe harbor and discretionary matches is that you look at what you did (i.e., including your discretionary, once you have determined what it is going to be), and then you just think about it arithmetically as the dollars, dispensing with the safe harbor and discretionary labels. So in your example, your combined safe harbor and discretionary matches have the result of a 200% match on deferrals up to the first 3% of pay, then a 150% match on deferrals of the next 1% of pay, and finally a $.50 match on deferrals up to the next 1% of pay. If that is the case, then I think this would be OK. A person deferring 5% of pay would get an 8% match, but you would not be matching on deferrals in excess of 6% (your safe harbor match only takes into account deferrals up to 5% of pay, and your discretionary match takes into account only deferrals up to 4% of pay), so 1.401(m)-3(d)(3)(i) would be satisfied, and your discretionary match does not exceed 4% of comp, so 1.401(m)-3(d)(3)(ii) would appear to be satisfied.