Profit Sharing to encourage more participation?

[Gilmore]

Company sponsors a safe harbor 401(k) plan.  Plan uses the basic safe harbor formula.  Plan also allows for profit sharing, each participant being there their own allocation class (with last day requirement).

The Plan Sponsor would like to encourage more participation from lower paid participants.  They are thinking of making an additional profit sharing contribution to non-HCEs only that hit certain deferral limits during the year.  For example, if they defer half of the 402g limit they would receive $500.  If they defer the full 402g limit they would receive $1000.  

Has anyone had a plan that had such a program?  If yes, how did you communicate the program to the participants?  I'm thinking at the very least you would have to be crystal clear about who is eligible each plan year and exactly how much they would have to defer to reach a profit sharing contribution level?  

Any thoughts would be appreciated.  Thanks!  

[C. B. Zeller]

You can't do that with profit sharing, it would violate the conditional benefit rule. It would have to be treated as a match, subject to the ACP test and the other 401(m) rules.

I am not sure whether you can do a match formula that is based on a flat dollar amount, as opposed to a percentage of pay. Personally I have never seen it done that way.

[Gilmore]

Thanks CB.  So even if the document remained discretionary in terms of the profit sharing, and the amount of the allocation was determined outside of the document, the fact that it is communicated to the participants as relating to their deferrals it would be considered as a match?  

[C. B. Zeller]

44 minutes ago, Gilmore said:

Thanks CB.  So even if the document remained discretionary in terms of the profit sharing, and the amount of the allocation was determined outside of the document, the fact that it is communicated to the participants as relating to their deferrals it would be considered as a match?  

Absolutely. How it's communicated doesn't really matter, if anyone gets any benefit, whether inside or outside the plan, that is determined based on whether or not they deferred, or how much they deferred, it is a violation. There are a few exceptions to this rule, one of which is matching contributions.

And a correction to my previous reply, it is called the "contingent benefit rule" not the "conditional benefit rule" as I said earlier. 1.401(k)-1(e)(6)

[BG5150]

How is that incentive good for lower paid worker in present day.

Half the 402g limit is $9,750.

That's almost 20% of a $50,000 salary.  All for what?  An extra measly $500 in my retirement account?

[Patricia Neal Jensen]

C.B. Zeller correct.  Cannot condition profit sharing on deferrals..... it is matching and subject to testing etc.

That said, Matching can be discretionary so I do not  understand what the big deal is to the plan sponsor about the difference between Matching and PS.  Add a Discretionary Match to the Plan and adopt a Board Resolution that says that it only applies to NHCE deferrals as follows:  Deferrals from 1% to 3% are matched 200% on the dollar; Deferrals from 3% to 5% are matched 100% on the dollar; deferrals from 5% to 10% are matched 50% on the dollar.  You will still have M testing, of course, but the goal for this idea should be to knock the lights out at the lower levels.   

[Luke Bailey]

7 hours ago, C. B. Zeller said:

You can't do that with profit sharing, it would violate the conditional benefit rule. It would have to be treated as a match, subject to the ACP test and the other 401(m) rules.

Agree.

 

7 hours ago, C. B. Zeller said:

I am not sure whether you can do a match formula that is based on a flat dollar amount, as opposed to a percentage of pay. Personally I have never seen it done that way.

Sure you can. But as you said, C.B., it is a match.

As to whether this makes sense, I guess it might, and it will pass ACP because only for NHCEs, but most folks think its kinder to their diverse workforce to have a long shallow ramp rather than a steep, short staircase. If it's an additional level of match added to a conventional match just for NHCEs, it might make more sense.

[Lou S.]

7 hours ago, C. B. Zeller said:

You can't do that with profit sharing, it would violate the conditional benefit rule. It would have to be treated as a match, subject to the ACP test and the other 401(m) rules.

I am not sure whether you can do a match formula that is based on a flat dollar amount, as opposed to a percentage of pay. Personally I have never seen it done that way.

The devil is in the details but you can absolutely do it as a match and easily pass ACP since you are doing the match only for NHCEs.

The trick would be coming up with a formula than gives $500 on the dollar that puts you over 1/2 the 402(g) limit and another $500 when you max out 402(g) limit and not match any other dollars.

 

[Gilmore]

Thanks everyone.  The $500 is not an issue, it was just the idea floated to me to see if it was possible.  

If a discretionary match is made just for the NHCEs in addition to the safe harbor match, is it only the discretionary match that is used in the ACP test, so ACP is satisfied with no additional match to the HCEs other than the safe harbor match?