ACP Test for Safe Harbor Match and Employee After-Tax

[PensionPro]

A 401(k) plan provides safe harbor match of 100% up to 6% deferred and permits employee after-tax contributions.  In performing the ACP test can I (a) include all match and after-tax, or (b) match over 4% and after-tax.

I am really looking for cites from the statutes or guidance for option (a) above, which I have not been able to find.  TIA!

[Bill Presson]

I don't believe any of the match is included in the ACP since it qualifies as safe harbor. This is why the after-tax contributions will fail unless it's an owner only plan or a very large plan where a lot of typical HCEs are excluded because of a top paid group election.

[C. B. Zeller]

The reference in question is 1.401(m)-2(a)(5)(iv)

Quote

(iv) Matching contributions taken into account under safe harbor provisions. A plan that satisfies the ACP safe harbor requirements of section 401(m)(11) or 401(m)(12) for a plan year but nonetheless must satisfy the requirements of this section because it provides for employee contributions for such plan year is permitted to apply this section disregarding all matching contributions with respect to all eligible employees. In addition, a plan that satisfies the ADP safe harbor requirements of §1.401(k)-3 for a plan year using qualified matching contributions but does not satisfy the ACP safe harbor requirements of section 401(m)(11) or 401(m)(12) for such plan year is permitted to apply this section by excluding matching contributions with respect to all eligible employees that do not exceed 4 percent (31⁄2 percent in the case of a plan that satisfies the ADP safe harbor under section 401(k)(13)) of each employee's compensation. If a plan disregards matching contributions pursuant to this paragraph (a)(5)(iv), the disregard must apply with respect to all eligible employees.

Since the reg says a plan is "permitted to" disregard the match (not required to) it follows that a plan is also permitted to include the match.

[Bill Presson]

39 minutes ago, C. B. Zeller said:

The reference in question is 1.401(m)-2(a)(5)(iv)

Since the reg says a plan is "permitted to" disregard the match (not required to) it follows that a plan is also permitted to include the match.

I stand corrected. This I did not know. I would be interested to see the math in a real life situation.

[PensionPro]

2 hours ago, C. B. Zeller said:

The reference in question is 1.401(m)-2(a)(5)(iv)

Since the reg says a plan is "permitted to" disregard the match (not required to) it follows that a plan is also permitted to include the match.

That reg says you can exclude all match or exclude match up to 4%.  I am not entirely understanding the argument that "it follows that a plan is also permitted to include the match."  I do not necessarily disagree with your position but trying to understand it better.  Perhaps there is another part of the reg that supports that position further?

[AKconsult]

In addition, a plan that satisfies the ADP safe harbor requirements of §1.401(k)-3 for a plan year using qualified matching contributions but does not satisfy the ACP safe harbor requirements of section 401(m)(11) or 401(m)(12) for such plan year is permitted to apply this section by excluding matching contributions with respect to all eligible employees that do not exceed 4 percent .

The above just means that if the plan uses a match that satisfies ADP but that does not satisfy ACP, then when the ACP test is performed, the plan may run the test by using all the match or is permitted to disregard the match that does not exceed 4%.  So it gives you a couple of options on how to run the ACP.  However, for the plan in question,  the safe harbor match is 100% of 6%, which satisfies both ADP and ACP, so I believe the above language is not applicable because this is not a case where the match does not satisfy the ACP test.  So, the  only thing that will be in the ACP test is the after-tax contributions.    

 

 

[MWeddell]

On ‎8‎/‎27‎/‎2020 at 2:47 PM, PensionPro said:

That reg says you can exclude all match or exclude match up to 4%.  I am not entirely understanding the argument that "it follows that a plan is also permitted to include the match."  I do not necessarily disagree with your position but trying to understand it better.  Perhaps there is another part of the reg that supports that position further?

The first sentence of regulation that C.B. Zeller quoted says that a plan that satisfies the ACP safe harbor rules but needs to run an ACP test anyway because it accepts traditional (non-Roth) after-tax employee contributions is permitted to perform the ACP by disregarding all matching contributions.  Doesn't that pretty clearly imply that the plan's ACP test may be performed without excluding all matching contributions?  If none of the provisions of Treas. Reg. Section 1.401(m)-2(a)(5) apply, then the match is included in the ACP test.

[MWeddell]

1 hour ago, AKconsult said:

So, the  only thing that will be in the ACP test is the after-tax contributions.    

 

 

One can include or exclude all matching contributions.  I agree that the second sentence of the regulations that C.B. Zeller quoted does not apply but the first sentence still does apply.

[AKconsult]

Yes, in looking at this again, I agree the Regulation does seem to indicate that if a plan that uses a match that satisfies ACP still needs to run an ACP test due to after-tax contributions, the ACP test can also include matching. 

[401kology]

I am going to pose this a little differently for clarification because my understanding is that if you use a safe harbor match to satisfy the ADP Test that you cannot double dip and use those in the ACP Test with After-Tax contributions.  

Contribution Only Used Once.
Amounts included in the ACR can be taken into account only once. Therefore, any amounts cannot be taken into account to the extent such contributions are used to satisfy any other ACP test, any ADP test, or the safe harbor requirements of the requirements for SIMPLE plans. Similarly, if a plan switches from the current year testing method to the prior year testing method, QNECs that are taken into account under the current year testing method for a plan year may not be taken into account under the prior year testing method for the next plan year. [Treas. Reg. section 1.401(m)-2(a)(6)(vi)]
(iii) Qualified matching contributions used to satisfy the ADP test. Qualified matching contributions that are taken into account for the ADP test of section 401(k)(3) under §1.401(k)-2(a)(6) are not taken into account in determining an eligible employee's ACR.(iv) Matching contributions taken into account under safe harbor provisions. A plan that satisfies the ACP safe harbor requirements of section 401(m)(11) or 401(m)(12) for a plan year but nonetheless must satisfy the requirements of this section because it provides for employee contributions for such plan year is permitted to apply this section disregarding all matching contributions with respect to all eligible employees. In addition, a plan that satisfies the ADP safe harbor requirements of §1.401(k)-3 for a plan year using qualified matching contributions but does not satisfy the ACP safe harbor requirements of section 401(m)(11) or 401(m)(12) for such plan year is permitted to apply this section by excluding matching contributions with respect to all eligible employees that do not exceed 4 percent (31⁄2 percent in the case of a plan that satisfies the ADP safe harbor under section 401(k)(13)) of each employee's compensation. If a plan disregards matching contributions pursuant to this paragraph (a)(5)(iv), the disregard must apply with respect to all eligible employees.

So for this example, let's say the ADP Safe Harbor Match is 100% up to 7% (this satisfies the ADP SH but does not satisfy the ACP Test SH - matches on deferrals above 6% and in aggregate is more than 4%).  In this example, the match in excess of 4% could be used in the ACP Test, but you could not use the full 7% because the first 4% is the amount necessary to satisfy the ADP Test.

[AS TPA]

What if the plan does not need the safe harbor match in order to satisfy the ADP Test but does need it in order to satisfy the ACP Test (safe harbor match + after-tax)?

[Bill Presson]

1 hour ago, AS TPA said:

What if the plan does not need the safe harbor match in order to satisfy the ADP Test but does need it in order to satisfy the ACP Test (safe harbor match + after-tax)?

Safe harbor match doesn't impact the ACP test of after-tax money.