safe harbor match with HCE discretionary match

[kgrant]

401k plan considering safe harbor match formula of 100% of the first 4% - would only apply to NHCE. The plan allows for discretionary match. The plan sponsor wants to fund HCEs with similar 4%  discretionary match but retain vesting on HCE as well as last day rule. 

1. Permissible Safe Harbor as match for NHCE = 4% and overall match for all  =4%?

2. Is the discretionary still subject to ADP (which it would fail, obviously)?

 

[ETA Consulting LLC]

I don’t think there is a convenient way to fit it onto any of the preapproved documents. There should be a way to preserve the safe harbor by guaranteeing the match to the NHCEs while making it discretionary and subject to accrual requirements for the HCEs. I’d bet (though I might lose) that this type of language could get a favorable opinion letter/advisory letter.

Good Luck! 

[Tom Poje]

yes, it is possible.

someone posted the following just a few weeks ago:

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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.

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as long as the discretionary formula can not produce an amount at any level which is greater for the HCE than for the NHCE formula it would be ok.

I'm not sure about the exact language used here, it would seem to me that the discretionary match isn't 'adp safe harbor but rather ACP safe harbor, but maybe that is just the semantics. is it was strictly adp, then it would seem like it would be 100% vested even though discretionary.

[kgrant]

Many thanks!  The intent is simply to add vesting to HCEs, not give them a different match percentage. So I can see where ADP is satisfied. My concern is with ACP.  The document permits excluding HCEs, with the exact language of the example above, but I am concerned that a vested match is not an "ADP test safe harbor contribution" 

If the HCEs have vesting and last day, they are essentially getting a discretionary match  - which I don't think qualifies for ACP Safe Harbor.  For example, let's assume only 40% of NHCEs participate and get the 4% match. The average NHCE test percentage is 1.6%, so the higher ACP limit for HCEs is 1.6% +2 = 3.6%.

If we give HCEs the same 4% (discretionary) match and all participate, their average is 4%. Since HCE match of 4% is greater than 3.6%, does ACP fail? In other words, the HCEs don't get "credit" for the plan being Safe Harbor since it is only ADP Safe Harbor, yet still subject to full ACP testing?

[Mike Preston]

3.6%?

[Luke Bailey]

It seems to me that with what you have described you're satisfying all of the requirements of 1.401(m)-3(c). Optics might be better if you didn't call the HCE match discretionary, but say all participants get 4%, but subject to vesting schedule for HCEs.

Form a policy perspective you are providing the NHCEs with the required incentive as much as if you said HCEs got the same fully vested match dollar for dollar on first 4%.

[Doc Ument]

The Corbel's document's provision excerpted above is clearly in the "ADP safe harbor" section of the AA (Question 27), not in the discretionary matching section of the AA at Question 28. The language excerpted by Tom Poje states that the discretionary HCE match is an "ADP test safe harbor contribution." Thus, I believe the discretionary HCE match being described at Corbel Question 27 is an ADP SH contribution that must be fully and immediately vested (unless the safe harbor is a QACA) and subject to the distribution restrictions on ADP SH contributions. Regulation 1.401(k)-3 seems to acknowledge that ADP SH contributions may be made for HCEs, i.e., the regulations seem to contemplate this type of design, but that would seem to mean that such contributions, even if discretionary for HCEs, must be vested as required by the ADP SH requirements (100% for non-QACAs) and subject to the restrictions on ADP SH distributions. I will assume the plan is not a QACA.

 

I conclude that a discretionary vested match cannot be treated as a traditional ADP SH contribution, and (whether or not a QACA), that such a match may not be described at Question 27 on the Corbel AA, since Question 27 is characterizing the HCE discretionary match as constituting an ADP SH match. In addition, Corbel AA Question 27 states that Q27 is connected to Section 12.8 and 12.9 of the BPD, which are the ADP SH sections that refer to the general matching contribution section contained at Section 12.1.  In contrast, Question 28 would be the place where I think a drafter must provide for any HCE-only match that has deferred vesting, as well as any match with allocation conditions.  That Question refers the drafter to Section 12.1 of the BPD.

 

This type of design, i.e., a discretionary ADP SH contribution for HCEs, arose because many employers wanted to back-out of the ADP SH contributions for HCEs after the start of the plan year (on the theory that HCEs are not required to receive ADP SH contributions).  That theory, though sound, overlooks that removing a promised contribution of any type will most likely violate the anti-cutback rule (which applies to both HCEs and NHCEs). By connecting the "discretion" of an HCE ADP SH contribution with the exclusion of HCEs, you can avoid the anti-cutback issue by choosing to provide the ADP SH to HCEs midyear (or after the end of the PY) by operationally removing the exclusion, rather than trying to operationally remove the inclusion of HCEs midyear.   For the Corbel EGTRRA document, among others, you were forced to either include or exclude HCEs, with no discretion to do anything different.

 

It is unlikely that any preapproved plan will provide for ACP safe harbor status unless specifically elected on the AA. That is to say, unless ACP SH status is selected on the AA, the plan is subject to the ACP test, even if in all other respects the plan would satisfy the requirement for an ACP SH. That being so, any matching contribution that is conditioned upon being employed on the last day of the plan year cannot be an ACP safe harbor contribution because one of the conditions of having an ACP SH is that the plan (at least most, if not all, preapproved plans) must ensure that it is impossible for any HCE to receive a higher rate of match than any NHCE who defers the same percentage of compensation Suppose that Jack and Jill each defer 4% but Jack, the HCE, still is employed on the last day of the PY, but Jill is not. Jack would receive a higher rate of match than Jill. Thus, no plan that wants to attach allocation conditions on the match should elect ACP safe harbor status on the AA.  That means the ACP test is required, absent any other special rule to the contrary.   I have one.

 

Most employers with an ADP SH match do not need to do an ACP test because most plans do not have an ADP SH matching formula that exceeds the amount that may be operationally excluded from the ACP test, per the second full sentence of Regulation 1.401(m)-2((a)(5)(iv), which is usually reflected in plan documents (including the Corbel document). For a non-QACA ADP match that is being ACP tested, ADP SH matching contributions of up to 4% of compensation may be excluded. That being so, I don't think you need to conduct the ACP test if you are willing to treat the HCEs match as an ADP SH match, and that is because no participant can receive an ADP SH match of more than 4% (provided there are no other matching contributions and no after-tax employee contributions). For the Corbel plan, the text is as follows:

 

(e)    Application of ACP test. The Plan is required to satisfy the ACP test of Code §401(m)(2), using the current year testing method, if the Plan permits after‑tax voluntary Employee contributions or if matching contributions that do not satisfy the "ACP test safe harbor" may be made to the Plan. In such event, only "ADP test safe harbor contributions" or "ACP test safe harbor contributions" that exceed the amount needed to satisfy the "ADP test safe harbor" or "ACP test safe harbor" (if the Employer has elected to use the "ACP test safe harbor") may be treated as Qualified Nonelective Contributions or Qualified Matching Contributions in applying the ACP test. In addition, in applying the ACP test, elective contributions may not be treated as "matching contributions" under Code §401(m)(3). Furthermore, in applying the ACP test, the Employer may operationally elect to disregard with respect to all "eligible Participants" (1) all "matching contributions" if the Plan satisfies the "ACP test safe harbor" and (2) "matching contributions" that do not exceed four percent (4%) (3 1/2% if a QACA) of each Participant's "Compensation" if the Plan satisfies only the "ADP test safe harbor" using "matching contributions" (the "basic matching contribution" or the "enhanced matching contribution") and the "ACP test safe harbor" is not satisfied.

 

I would prefer that the last nine words of that paragraph were either deleted or put into parentheses. Even so, I believe the intent of that document's drafter was to say that clause #1 applies for ACP SH plans and clause #2 applies for all other plans. The cited regulation supports that interpretation.

 

In your latest example, you have NHCEs with an ACP of 1.6% (I think Mike Preston is suggesting that the HCE limit would therefore be 3.2%, i.e., 200% of 1.6%, not 3.6%). If, though, you disagree that the first 4% in ADP SH contributions can be excluded from the ACP test, or you do not have a plan document that reflects the regulation (and feel uncomfortable implementing the regulation for that reason), then perhaps the employer can find enough non-deferring HCE(s) to make this design work. Otherwise, you may need to deal with correcting a failed ACP test. Or you need to give up the deferred vesting.

 

If (for whatever reason) you decide you do not want to (or cannot) treat the HCE contribution as an ADP SH contribution, perhaps because the employer insists that full vesting is not acceptable, then it is conceivable there is a "benefit, rights, and features" issue in here somewhere. (I am not an expert in BRF testing.) I don't know whether the fact that the 4% match has different vesting provisions and distribution restrictions raises a BRF issue. But the plan might allow HCEs to withdraw the 4% discretionary non-ADP-SH match in-service prior to age 59 1/2, whereas NHCEs cannot withdraw their 4% ADP SH match in-service until age 59 1/2 (since their 4% match is an ADP SH contribution). Suppose that Jack and Jill both have a 4% deferral and a 4% match, but Jack, the HCE gets to withdraw (while in service) the 4% under the terms of my hypothetical document at age 50 (since his match is not an ADP SH match since it is not fully vested), whereas Jill, as an NHCE, must wait until age 59 1/2 for an in-service distribution, since her match is an ADP SH match.  In addition, you must determine if Question 28 on the Corbel AA has preapproved options that will support providing for an HCE-only ordinary match (I didn't examine the AA in that regard).

 

Please note that I may be unable to timely respond to any inquiries about my post, and for that, I apologize in advance. I certainly will not see any inquiries before late Wednesday, if then. I was sorely tempted not to respond to this thread, since I am quite distracted by other endeavors for the foreseeable future, and don't wish to be seen as having posted a response and then fail to timely respond to any issues raised by my post. However, being familiar with this proposed design as well as the Corbel document provision under discussion, I thought I should jump in. (I also initially thought my response was going to be short. That didn't work out as planned.)

[Tom Poje]

the problem with the match in the original question is having a last day rule. that fails the safe harbor requirement. but since you are permitted to run the ACP test including safe harbor match contributions it is doubtful the plan would fail ACP testing.

1.401(m)-2(a)(5)(iv)...a plan that satisfies the ADP safe harbor can exclude matching contributions that do not  exceed 4% of all eligible employees.

.

At the 2013 ASPPA conference, Q and A 22 the question was asked

May a plan that limits the ADP/ACP safe harbor to NHCEs only also have a discretionary match for HCEs only (provided such match doesn't exceed the NHCE at any level) and the IRS responded in .the affirmative (Granted such responses don't necessarily reflect an actual Treasury position)

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so

1. does the plan satisfy ADP safe harbor? - yes

2. does the plan satisfy ACP safe harbor - yes, when looking at the combination of all matching contributions.

Recall, when looking to see if a plan satisfies the requirement that no HCE receives more at any level of match you look at the combination of all formulas, not just the individual match formula. I assume that means BRF is done in the same manner. And the discretionary can have vesting applied as long as there are no eligibility requirements (e.g. hours or last day)

So it appears you could do this, if the Corbel document had said "ACP safe harbor' instead of 'ADP safe harbor' I would have said that would work. I did not notice that subtle language difference the first time on the post I pulled the document language.

[kgrant]

Many thanks to all!