Tips and safe harbor 401(k) Plan -

[52626]

Charged tips will be paid via W-2 wages. Participants are able to defer on these tips.

The employer makes a Safe Harbor Match Contribution- They want to exclude tips from the definition of compensation for the safe harbor match.

1. Can tips be excluded from compensation for the Safe Harbor Match?

2. If yes, since the plan is safe harbor, this mid year amendment to change formula and definition of compensation is not allowed for 2020?

3. Since this would not meet the safe harbor definition of compensation, the plan would need to pass compensation test at year end ? 

4. Not a Top Heavy Plan.

 

Thanks

[Kevin C]

1. Maybe (see #3), but doing it mid-year would be a reduction in the safe harbor contribution, which puts you under the rules in 1.401(k)-3(g).

2. If the plan meets the requirements in 1.401(k)-3(g), the safe harbor contribution can be reduced mid-year, but the plan would not be safe harbor for that year. If they want to change during 2020 bad enough, it can be done along with a change in the plan year.

3. The definition of safe harbor compensation used must satisfy the requirements of 414(s).  [1.401(k)-3)(b)(2)]. It does not have to be a 414(s) safe harbor definition.  Some plan documents have a provision that if the safe harbor compensation definition used doesn't satisfy 414(s), it automatically changes to a specific definition that meets one of the 414(s) safe harbors.  Without such a provision, you would need a corrective amendment if the safe harbor compensation definition used doesn't satisfy 414(s).  I would expect most of the tips to be for NHCEs, which would make it very difficult to pass 414(s).  I would look at prior years to see if the definition they want would have passed 414(s) if it had been used before doing the amendment. Otherwise, there may be an unpleasant surprise waiting down the road.