SH starts mid year, what comp?

[BG5150]

PS plan effective 1/1/2017 added 401(k) and QACA SH on 3/1/18.  

 

What comp am I using for the SH?  Plan comp says full year and not participation comp.

 

Total senior moment right now.

[Larry Starr]

4 hours ago, BG5150 said:

PS plan effective 1/1/2017 added 401(k) and QACA SH on 3/1/18.  

 

What comp am I using for the SH?  Plan comp says full year and not participation comp.

 

Total senior moment right now.

Not sure I understand your question.  You say plan says use full year; why is there a question?

[Gadgetfreak]

I thought that SH comp can only be based on when 401k deferrals were effective. At least that is what a recent discussion with FTW yielded when I was creating a new SH plan now, effective 1/1/19 but beginning deferrals and SH on 10/1/19. And they also confirmed that it didn't matter if it was the 3% SHNE or an SHM - SH is only based on the effective date of deferrals. Do you disagree?

[chc93]

8 hours ago, Gadgetfreak said:

I thought that SH comp can only be based on when 401k deferrals were effective. At least that is what a recent discussion with FTW yielded when I was creating a new SH plan now, effective 1/1/19 but beginning deferrals and SH on 10/1/19. And they also confirmed that it didn't matter if it was the 3% SHNE or an SHM - SH is only based on the effective date of deferrals. Do you disagree?

In our case, with the 3% SH, we had an ERISA attorney say the same thing.  Mid-year, 401k deferrals started.  Comp for 3% SH was only from date 401k deferrals started.  Sorry, but did not address SHMatch in this case.

[Larry Starr]

9 hours ago, Gadgetfreak said:

I thought that SH comp can only be based on when 401k deferrals were effective. At least that is what a recent discussion with FTW yielded when I was creating a new SH plan now, effective 1/1/19 but beginning deferrals and SH on 10/1/19. And they also confirmed that it didn't matter if it was the 3% SHNE or an SHM - SH is only based on the effective date of deferrals. Do you disagree?

Just to make sure I understand the question: We have a brand new plan established for an existing employer.  It is a 401(k) safe harbor with a non-elective 3%. The plan is established 9/1/19.  Are you suggesting that the 3% is only applicable to 9/1 - 12/31 compensation, even though the plan is using full calendar year comp for everything else?

[Larry Starr]

9 hours ago, Gadgetfreak said:

I thought that SH comp can only be based on when 401k deferrals were effective. At least that is what a recent discussion with FTW yielded when I was creating a new SH plan now, effective 1/1/19 but beginning deferrals and SH on 10/1/19. And they also confirmed that it didn't matter if it was the 3% SHNE or an SHM - SH is only based on the effective date of deferrals. Do you disagree?

OK; I found the reference in the EOB.  It is OPTIONAL to limit comp to only the period of deferrals.  I read it quick but I think this is the issue.  Particularly, see 5.c. below. Here is the text:

5.a. Compensation may be limited to period of eligibility. If an employee becomes eligible as of a date other than the first day of the plan year, the plan is able to limit compensation to the period of eligibility to calculate the amount of matching contributions or nonelective contributions required under the prescribed formula. See Treas. Reg. §1.401(k)-3(b)(2) and Notice 98-52. This rule is not mandatory. The plan may instead take into account compensation for the entire plan year even though the employee is only eligible for part of that year. The plan document will control.

 

5.a.1) Example - safe harbor matching contributions. Claudia becomes an eligible employee in her employer's 401(k) plan on July 1. The plan year ends December 31 and the plan is designed to be a 401(k)(12) safe harbor plan. The plan provides for the safe harbor matching contribution, using the basic formula described in 1.a.1) above. Susan's compensation from July 1 to December 31 is $18,000. The plan may provide that Susan's matching contribution is based on $18,000 of compensation, rather than on her compensation for the entire plan year. This would mean a match of 100% on the first $540 deferred (i.e., 3% x $18,000), plus a match of 50% on the next $360 deferred (i.e., 2% x $18,000). So, if Susan defers $900, her match would equal $720.

➤ Comparison to full plan year approach. Compare this to the match Susan would receive if her entire year’s compensation were taken into account. Suppose that Susan deferred $900, but the plan counted her entire year’s compensation under the matching formula, and her compensation for the entire plan year is $36,000. Now $900 would be less than 3% of her compensation (i.e., 3% x $36,000 is $1,080), so Susan’s match would be $900 under the basic formula.

 

5.b. Example - safe harbor nonelective contribution. Suppose the plan satisfies the 401(k)(12) safe harbor on the basis of the nonelective contribution requirement. If the plan limits compensation to the period of eligibility, Susan's nonelective contribution would equal $540 (i.e., 3% x $18,000), rather than 3% of her entire year's compensation.

 

5.c. New plan. The same rules would apply to a new plan, where the employees are eligible to defer under the 401(k) arrangement for less than 12 months in the first plan year.

QACA safe harbor. Guidance issued under the QACA safe harbor provides the same rule for a new plan established after December 31, 2007, that is designed to use that alternative safe harbor rule and is in effect for less than 12 months in the first plan year. See Treas. Reg. §1.401(k)-3(a)(2).

 

5.c.1) Example. A new 401(k) plan is effective July 1. The plan year ends December 31, so the first plan year is a 6-month period that begins on the July 1 effective and ends on December 31. The plan is designed as a 401(k)(12) safe harbor plan. Since employees are eligible to defer under the 401(k) arrangement for only six months in the first plan year, the ADP safe harbor contribution may be calculated by taking into account compensation for only that six-month period.

 

[BG5150]

In my case this ISN'T a new plan.  

Plan effective 1/1/2017.

They added 401(k) & Safe Harbor in March 2018.

Compensation is NOT only while a participant (in any component of) the plan.

[Mike Preston]

The operative word is may.  In our language that also means may not.

[Larry Starr]

24 minutes ago, BG5150 said:

In my case this ISN'T a new plan.  

Plan effective 1/1/2017.

They added 401(k) & Safe Harbor in March 2018.

Compensation is NOT only while a participant (in any component of) the plan.

OK: See notice 2000-3, Q 11.  Copied below (see material made bold and italic):

Q-11. Can a CODA that is added to an existing profit-sharing plan for the first time during a plan year use a 401(k) safe harbor method for that plan year? A-11. Generally, the safe harbor requirements must be satisfied for the entire plan year (see sections V.A. and VI.A. of Notice 98–52). In addition, except in the case of a newly established plan, the plan year must be 12 months long (see section X of Notice 98–52). Notwithstanding these requirements, however, in the case of a CODA that is added to an existing profit-sharing, stock bonus, or pre-ERISA money purchase pension plan for the first time during a plan year, the requirements of section V of Notice 98–52 will be treated as being satisfied for the entire plan year and the CODA will not be treated as failing to satisfy the requirements of section X of Notice 98–52, provided (1) the plan is not a successor plan (within the meaning of Notice 98–1), (2) the CODA is made effective no later than 3 months prior to the end of the plan year, and (3) the requirements of Notice 98–52 are otherwise satisfied for the entire period from the effective date of the CODA to the end of the plan year. Thus, an existing calendar-year profit-sharing plan that does not contain a CODA may be amended as late as October 1 to add a CODA that uses a 401(k) safe harbor method for that plan year. A similar rule applies for purposes of section VI of Notice 98–52 in the case of the addition of matching contributions for the first time to an existing defined contribution plan at the same time as the adoption of the CODA.

[BG5150]

Per the authors of my doc, FT William, in a situation such as mine, it is up to the ER to decide which comp to use (as long as it's documented in the AA.)

[Larry Starr]

2 hours ago, BG5150 said:

Per the authors of my doc, FT William, in a situation such as mine, it is up to the ER to decide which comp to use (as long as it's documented in the AA.)

So, it's not "up to the employer" as to which comp to use; it's up to the employer to DESIGN THE PLAN to designate which comp to use.  I know that's what you meant, right?

[BG5150]

Yep.