Safe Harbor Match with Discretionary Match

[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?

[ETA Consulting LLC]

As long as no amount of deferrals exceeding 6% of Compensation receives the match, then you are fine with respect to that standard.  If you earn $100,000 in Compensation and defer $7,000; the only deferrals receiving match (under the safe harbor) would be $6,000.  You can design the plan so that matching contributions of $25,000 are made on that $6,000 in deferrals (and meet the ACP safe harbor).  You just cannot match the amounts deferred that exceed that $6,000.  There are additional safe harbor requirements.  This is merely with respect to the level of deferrals that receive the match.

Good Luck!

[Tom Poje]

this can get a little crazy, but yes, each match formula is 'independent' if that is a good description, as long as combined you don't receive at some point a higher rate of match in combination the more you defer

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the discretionary match is limited to 4% of comp, so a common formula for that is

66.6% up to 6% deferred

...

one example sometimes suggested is a triple stack match - here is one example, but they all seem to be the same. hurts my brain to read things like this, but that is me!

http://employeebenefitplanaudit.belfint.com/how-to-order-a-triple-stack-match-for-your-plan/

Stack One: 100% of the first 3% of deferrals, plus 50% on the next 2% of deferrals. That means that if an employee defers 5%, they will receive the maximum 4% of compensation match on the first stack. If we also assume our owner is doing extremely well and earning the maximum includible annual compensation of $265,000, he/she would have to be deferring at least 6.79% of compensation. At this point, our owner has contributed $18,000 and received a match of $10,600 without being subject to any discrimination testing.

Stack Two: A discretionary match of 66-2/3 % of deferrals up to 6% deferred. To continue to qualify as safe harbor, the allocation of an additional discretionary match cannot exceed 4% of compensation and the match is limited to the first 6% of compensation deferred. Since 4% divided by 6% is 66.67%, this means that matching up to 6% of compensation to achieve an overall 4% of compensation match would require a 66.67% match for every dollar contributed up to 6% of compensation. Still using $265,000 as compensation, we have another contribution of $10,600 ($265,000 x 6% x 66.67%) for a total annual addition after stack two of $39,200 ($18,000 deferral + $10,600 stack one match + $10,600 stack two match).

Stack Three: A fixed match of X% of deferrals up to 6% deferred. To meet safe harbor requirements, participant deferrals above 6% cannot be matched and can never be greater than 6% of compensation. To find our third stack, we must solve for the percentage that will get our owner to the maximum contribution. $53,000 – $18,000 – $10,600 – $10,600 = $13,800. If we take 6% of our owner’s compensation of $265,000, the maximum amount of deferrals to be matched is $15,900. If we divide $13,800 by $15,900, we find out that the owner in our example must receive a third matching contribution of 86.79% of deferrals up to 6% deferred to get to the maximum annual addition of $53,000.

[JackS]

Both matches have to meet the ACP requirements in order to exempt from the ACP test.  Your ADP SH match does not necessarily meet the ACP SH requirements (e.g. 100% of 8% would satisfy the ADP SH but would NOT satisfy the ACP SH).  As long as both the SHMC and the Disc Mc meet the requirements separately (not added together), the plan is exempt from the ACP test for that year.  I don't think there is anything to "combine" unless you do have to apply the ACP test. 

[Madison71]

Ok - I can't get what should be a simple concept embedded in my brain. I get the concept....I think.  Not sure why there is this limit as the higher percentages of compensation would benefit the NHCEs.  There is the 6% rule on match - is this both fixed formula - whether safe harbor match or not?  Discretionary match has no such rule, correct?  

[Tom Poje]

The IRS is concerned about giving a free ride on the ADP/ACP test.

for example, it is more likely an HCE can defer 10% than an NHCE. so the IRS imposed an 6% limit on deferrals in regards to matching contributions. Maybe they figured even lower for NHCEs - expecting 4%, plus 2% to leeway to pass testing if plan was not a safe harbor.

all match contributions have a cap of 6% maximum amount of deferrals that can be matched, not 6% match. Discretionary match is also limited to 4% of total comp - no such limit exists for the basic match.

[Madison71]

Thanks for trying Tom - I understand the IRS concern, but it is just not sticking in my brain.  I thought basic match was subject to 6%?  Discretionary is subject to 4% of total comp?  What about if that is the only match you offer in the plan?  No limit there, correct?  

[Tom Poje]

If the only match you have is discretionary then you must has the 3% SNHEC to pass ADP

now the discretionary could be 100% of the first 4% deferred or 66.67% of the first 6% deferred or something similar. I suppose you could 200% of the first 2% deferred

as long as you don't receive more than 4% of compensation.