Safe Harbor plus Discretionary Match - 2019

[ldr]

If this is a breach of protocol I apologize in advance.  I first tacked it on to the end of an old thread and then I decided that maybe nobody reads old threads and that maybe I should start it as a new topic.  Thank you.

Hi to all!  I'd like to tack my new question on to this old thread because they related to each other and even though I have read this 5 times I am still not sure how to handle my situation.

I have an employer who wants to motivate his employees to defer more and in his ideal world they would defer 15% of pay and he would match 10%.  No, for real, I really do have someone this generous!  For 2019 he has already distributed a SH Match notice promising the employees dollar for dollar up to 6% of pay - already really generous.  He's trying to figure out how to structure a discretionary match on top of the SH for 2019 that would reward employees who put in more than 6% of pay, in such a way that if someone put in 15%, they would end up with a total of 10% in employer match.  He understands that at least some if not all of the match would be subject to the ACP test and that if the test fails, refunds might have to be made, and he doesn't care.

At first he, and we, were thinking that he could do a discretionary match of 44.44% on deferrals between 6.01% and 15% of pay.  For the guy who defers $15,000 on a $100,000 salary, this would get him a $6,000 SH match plus a $4,000 extra match for a total of $10,000.  

Then we started reading passages about having to calculate the discretionary match on all of the deferrals, not just the percentage over 6% of pay.  In that case, the extra match would be 26.66% of all deferrals up to 15% of pay deferred.  This would get our $100,000 person the $6,000 in SH Match plus the extra $4,000 in discretionary match for a total of $10,000.  However, of course, it would increase the cost of the lesser paid/lower deferring people.  I don't think this employer minds doing this, if the rules require it.  He just wants to know what to do within legal parameters to achieve his goal.

So here we go:

1. Must we structure the discretionary match to include all deferrals from the first dollar?

2. What exactly goes into the ACP test?  The discretionary match only, or the total match including the Safe Harbor?

We mostly deal with employers who won't even pay a Safe Harbor match, let alone do more, so it just hasn't come up before.

Thanks in advance for helpful advice!

[ETA Consulting LLC]

I would imagine you could reduce the safe harbor match to $1 for $1 up to 4%,  and then do a tiered match beginning with $.3333 for each $1 up to 6% and so on.  This, alone, would get you started at $1 for $1 up to 6% (while only 4% would be the safe harbor). 

Good Luck!

[Tom Poje]

a typical discretionary match that would satisfy safe harbor (in addition to any other safe harbor match) would be either 100% up to 4% or 66.667% up to 6% deferred

these satisfy the max deferral considered at the required cap of 6%

and the max discretionary match at 4% of compensation.

Again, that is added to any other safe harbor match. I've seen 3 tiered formulas - basic match required match and discretionary match

I realize the goal is to get people to defer more, but if there is any match above 6% deferral then you have ACP testing, because the govt doesn't expect NHCEs on the whole to be able to defer more than 6%, and they don't want to give a free ride on the ACP test to the HCEs under those expectations

[ldr]

Hi to ETA and Tom Poje,

Thank you both for answering.  Tom, let me talk through what I think you said to be sure we are on the same page.

The plan would have the already promised dollar for dollar up to 6% of pay deferred as the Safe Harbor match.  That is of course 100% vested and has no hours requirement, no last day, etc.

Then for 2019, he would declare a discretionary match of 66.667% up to 6% of pay deferred.  This contribution would be on their vesting schedule and subject to the 1000 hour and last day requirements.  This would get someone to the 10% goal line without incurring any ACP testing.  This is looking good to me as the TPA because of the ability to avoid ACP testing altogether.  It's an approach I could heartily recommend.

However, the client isn't worried about the ACP test.  He wanted to do what I explained above and take his chances with the test.  He doesn't care if the HCEs don't get to keep all of what might be allocated to them.  So if we do what he wants, the questions still remain:

1. Must we structure the discretionary match to include all deferrals from the first dollar?  Is it impermissible to structure a discretionary match that only applies to deferral contributions above 6% of pay?

2. What exactly goes into the ACP test in this case?  The discretionary match only, or the total match including the Safe Harbor?

Thank you very much.

 

 

 

 

 

 

[Tom Poje]

prior to 2006 you could have allocation conditions and satisfy safe harbor, but now you can't, so really the only thing special about the discretionary safe harbor match is it is subject to vesting.

for ACP testing you either include all match or you could exclude 4% of the match. I think the reasoning being you used the Basic match to satisfy the ADP test, so it is optional to include or exclude from ACP testing. (Because if it was the only match you wouldn't run the ACP test anyway.

[ldr]

Thanks, Tom!  Happy Holidays! ?