Safe Harbor and Top Heavy

[CLE401kGuy]

• Plan is a 'definite' 3% safe harbor annually.   
• HCE's are excluded from receiving the safe harbor contribution.
• Plan is 89% top heavy
• Compensation is recognized from date of participation
• Plan is allocating 3% safe harbor to NHCE's
• Plan is allocating 3% profit sharing to HCE's

Question:  I have one 'mid-year' entrant so the safe harbor is given on participation wages.   Since the plan is also allocating 3% profit sharing to the HCE's, what am I required to give the mid-entrant? 

A. just the 3% safe harbor on participation wages, or

B. 3% safe harbor on participation wages + 3% profit sharing on wages earned before  plan entry (i.e. total of 3% contribution on full years wages

Thanks!

[BG5150]

The person must get a total of 3% of 415 wages, which does not exclude pre-participation comp.

[CLE401kGuy]

Thanks for the quick response - that was what i was thinking would be correct - I appreciate it!

[JackS]

If the plan doc allowed for a discretionary SH to HCE's and they did that I believe you would preserve the TH exemption for the year.  If it didn't the employer would need to make a PS and then you lose the SH exemption. 

[Bird]

22 hours ago, CLE401kGuy said:

A. just the 3% safe harbor on participation wages, or

B. 3% safe harbor on participation wages + 3% profit sharing on wages earned before  plan entry (i.e. total of 3% contribution on full years wages

B.

There are contributions other than SH so TH applies.

I'm not sure what "discretionary SH to HCEs" is, perhaps the "maybe" SH with follow-up notice, but in any event that is not the case here.  Very clearly, HCEs are getting PS, not SH.

 

[Belgarath]

Bird - some documents (FIS/Relius, for example)allow you to exclude the HCE's from receiving the safe harbor, but also allow a "discretionary" safe harbor to be made to HCE's - as long as it is equal to or less than the safe harbor contribution given to the NHCE's. IRS pre-approved doc., doesn't blow your top heavy exemption.

[Bird]

At what point is it discretionary - do they need the follow up notice by Dec 1?

[JackS]

4 hours ago, Bird said:

B.

There are contributions other than SH so TH applies.

I'm not sure what "discretionary SH to HCEs" is, perhaps the "maybe" SH with follow-up notice, but in any event that is not the case here.  Very clearly, HCEs are getting PS, not SH.

 

 

1 hour ago, Bird said:

At what point is it discretionary - do they need the follow up notice by Dec 1?

Here is the language form the Corbel Doc.  There is no notice required.  The employer can decide to make it after PYE just like any other discretionary contribution. 

Excluded Participants. For purposes of the "ADP test safe harbor contribution," the term "eligible
Participant" means any Participant who is eligible to make Elective Deferrals unless otherwise excluded below (leave blank if no exclusions):
f.   [  ]    Exclusions (select one or more):
1. [ ]  Highly Compensated Employees (HCEs). The Employer may, however, make a discretionary "ADP test safe harbor contribution" for the HCEs in a percentage that does not exceed the amount (or in the case of a matching "ADP test safe harbor contribution," the rate) provided to the NHCEs.

 

[Tom Poje]

I would never have thought of setting a plan up that way.

It makes sense you could do it since only NHCE have to receive the safe harbor. but it seems weird to put in a safe harbor to avoid ADP/ACP testing and top heavy and then make giving to the HCEs optional.

[Bri]

I'm not sure why you'd give any "little bit extra" as safe harbor rather than just profit sharing.  At least as PS, you could impute disparity on the rate in any potential 401a4 testing

[Tom Poje]

Bri - because, if it is a profit sharing then the top heavy rules kick in, and then, for instance, people who entered mid year would have to get more to satisfy the top heavy as well as the safe harbor.

 

I tripped across Q and A 22 at the 2103 conference where the IRS said it is ok to have the safe harbor for the NHCEs and a discretionary for the HCEs (assuming of course the HCE can't receive at a greater rate than the NHCE formula)

I suppose the Corbel document was changed at that point. years before that when I was sitting in a pre-session with the IRS I had asked if the SHNEC could simply say "at least 3%" and the IRS person said (grabbing a copy of the regs) it is quite clear, then paused, and said, "well, it does say at least 3%% so you should be able to do that." and shortly after that, documents started using that language instead of hard coded at fixed %".

[Bird]

19 hours ago, JackS said:

Here is the language form the Corbel Doc.  There is no notice required.  The employer can decide to make it after PYE just like any other discretionary contribution. 

Excluded Participants. For purposes of the "ADP test safe harbor contribution," the term "eligible
Participant" means any Participant who is eligible to make Elective Deferrals unless otherwise excluded below (leave blank if no exclusions):
f.   [  ]    Exclusions (select one or more):
1. [ ]  Highly Compensated Employees (HCEs). The Employer may, however, make a discretionary "ADP test safe harbor contribution" for the HCEs in a percentage that does not exceed the amount (or in the case of a matching "ADP test safe harbor contribution," the rate) provided to the NHCEs.

Thanks!  I already learned something today so maybe I'll go home...

[Bri]

Good point, Tom - I was still thinking in my head of a plan where there was going to be extra HCE PS anyway (like a "3 and 9" setup).