4% minimum deferral rate

[justanotheradmin]

A sponsor wants to amend their plan to require employees who defer to defer at least 4%. Employees cannot elect a lower percentage unless it is zero. 

Other than needing to be tested under 401(a)(4) - how would we even do this?

Is this permissible? It seems like it would flagrantly disfavor NHCE. 

Complicating matters is the plan presently has a Safe Harbor match, and plans to keep it for the foreseeable future. 

Thoughts? 

[Doghouse]

You probably saw this but per the EOB. A 4% minimum would, in my mind, not follow the guidance.

Minimum deferral rate and minimum increments permitted. Q&A-3 of IRS Notice 2000-3 permits safe harbor 401k plans to require salary reduction elections to be in whole dollar amounts or in whole percentages of compensation. Section V.B.1.c.ii. of IRS Notice 98-52 stated that a safe harbor 401(k) plan could set a maximum limit on elective deferrals, so long as an employee's ability to get the maximum match available under the plan was not compromised, but had to permit the employee to elect to contribute "any lesser amount." The ability to require whole dollar amounts or whole percentages is a reasonable compromise. Thus, a minimum elective deferral rate of 1% of compensation could be required by a safe harbor 401(k) plan. The regulations adopt the Notice 2000-3 approach as well. See Treas. Reg. §§1.401(k)-3(c)(6)(iii) and 1.401(m)-3(d)(6)(iii).

[Lou S.]

Sounds like it would violate BRF in a non-safe harbor plan.

Sounds like it would completely blow up in in a SH plan as the rate of matching contributions increases at 4% from 0% to something larger than 4% since deferral rates of 0.01 - 3.99 are not allowed.

 

[justanotheradmin]

Thank you Doghouse and Lou S. Especially the EOB cite. I knew there was something out there on point, but just couldn't put my finger on it. 

[pensiongeek]

Doghouse, can you please confirm the section of the EOB?

[MWeddell]

It may violate the effective availability portion of BRF testing in a non-safe harbor 401(k) plan, but I don't think that's a definite conclusion, just a risk.

[Doghouse]

The EOB cite is from Chapter 11, Section XIV, Part I, #3.

[Luke Bailey]

justanotheradmin, totally agree with Doghouse, except why bother with anything other than the reg cites. They flat-out prohibit if you are SH.