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2 for 1 match


Nic Pospiech

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I have a client who wants to do a Safe Harbor plan with the following formula:

For each 1% contributed, the Employer will contribute 2% (maximum 5%)

So - if a participant contributes 5% - they would receive a 10% match  (2 for 1)

the max comp for Safe harbor is 6% - the max allowed in the plan is 5% 

Does this mean that this is a valid Safe Harbor Match Formula? 

or would i have to separate this between SH Match and Discretionary Match?

 

Thanks!

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The plan can have an enhanced Safe Harbor Match and match 200% on participant elective deferrals up to 5% of compensation.

That is the "there" in your question.  What also in important to discuss with the client is how to get "there" from where the plan is currently - the "here".  For example:

  • Is this a new plan?
  • If it is an existing plan:
    • what it the plan year?
    • does it have a 401(k) feature?
    • does it have any other safe harbor features (existing safe harbor match, safe harbor non-elective contribution, QACA) and if yes, what are they?
    • does it have an existing match?  If yes, what are the eligibility provisions and what are any allocation conditions?

The answers to these and other questions may factor into how and when the plan can get to "there" from "here".

 

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It is a brand new plan.  No existing anything. :)

I was thinking we could probably set it up the way he wanted, but ADP was indicating he couldn't use this Safe Harbor Formula...so I just wanted to make sure I was correct, 

Thanks!

 

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Just now, Nic Pospiech said:

I was thinking we could probably set it up the way he wanted, but ADP was indicating he couldn't use this Safe Harbor Formula...so I just wanted to make sure I was correct, 

In my experience - what a provider will accommodate - and what is allowed under the regulations - are two different things. Particularly when using a more streamlined vanilla efficiency service model provider like ADP (which has its place) there are limitations. If a plan wants a more custom design, they need to find a provider willing to do it, and it may be more expensive. 

I'm a stranger on the internet. Nothing I write is tax or legal advice. 

I'd like a witty saying here, but I don't have any. When in doubt, what does the plan document say?

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Nic, Clarify whether you are proposing that the match satisfy the ADP safe harbor or the ACP safe harbor. My initial thought was that you are talking about the ADP safe harbor using an enhanced match formula.  The match would then be 100% vested and subject to distribution restrictions.

But, your reference to "the max comp for Safe harbor is 6%" confused because that is an ACP safe harbor requirement.

Your proposed match formula would satisfy ADP. But, would not satisfy ACP safe harbor if that is what you're trying to do here (i.e., match subject to vesting schedule) because the match is more than 4% of compensation. And, remember -- you can't use the ACP safe harbor unless you are also satisfying ADP safe harbor (e.g., with 3% non-elective employer contribution).

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6 minutes ago, JRN said:

Nic, Clarify whether you are proposing that the match satisfy the ADP safe harbor or the ACP safe harbor. My initial thought was that you are talking about the ADP safe harbor using an enhanced match formula.  The match would then be 100% vested and subject to distribution restrictions.

But, your reference to "the max comp for Safe harbor is 6%" confused because that is an ACP safe harbor requirement.

Your proposed match formula would satisfy ADP. But, would not satisfy ACP safe harbor if that is what you're trying to do here (i.e., match subject to vesting schedule) because the match is more than 4% of compensation. And, remember -- you can't use the ACP safe harbor unless you are also satisfying ADP safe harbor (e.g., with 3% non-elective employer contribution).

Are you opposed to the formula if a vesting schedule applies - or are you opposed to the formula because it would consider compensation up to 6%?

Those are two different things. 

I agree an ACP Safe Harbor Match ( not a QACA) cannot impose vesting. I disagree that it can't consider deferrals up to 6% of compensation. Plans have safe harbor match formulas that are more generous than the default (basic match) all the time. $1:$1 up to 6% is popular. in this case Nicis proposing $2Match:$1deferral up to deferrals of 6% of compensation. 

I'm a stranger on the internet. Nothing I write is tax or legal advice. 

I'd like a witty saying here, but I don't have any. When in doubt, what does the plan document say?

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15 hours ago, JRN said:

Distinguishing between ADP and ACP safe harbors. I agree that Nic's enhanced match formula satisfies ADP safe harbor.

 

Is there a reason why it wouldn't satisfy the ACP safe harbor? 

 

I agree that if it is a discretionary match on top of the fixed safe harbor match it wouldn't work. But as a fixed safe harbor match I'm not seeing it exceeding any limitations. 

From §1.401(m)-3(d)(3) 

"(3) Limit on matching contributions. A plan that provides for matching contributions satisfies the requirements of this section only if—

(i) Matching contributions are not made with respect to elective deferrals or employee contributions that exceed 6% of the employee's safe harbor compensation (within the meaning of § 1.401(k)–3(b)(2)); and

(ii) Matching contributions that are discretionary do not exceed 4% of the employee's safe harbor compensation."

https://www.law.cornell.edu/cfr/text/26/1.401(m)-3

I'm a stranger on the internet. Nothing I write is tax or legal advice. 

I'd like a witty saying here, but I don't have any. When in doubt, what does the plan document say?

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20 hours ago, JRN said:

Nic, Clarify whether you are proposing that the match satisfy the ADP safe harbor or the ACP safe harbor. My initial thought was that you are talking about the ADP safe harbor using an enhanced match formula.  The match would then be 100% vested and subject to distribution restrictions.

But, your reference to "the max comp for Safe harbor is 6%" confused because that is an ACP safe harbor requirement.

Your proposed match formula would satisfy ADP. But, would not satisfy ACP safe harbor if that is what you're trying to do here (i.e., match subject to vesting schedule) because the match is more than 4% of compensation. And, remember -- you can't use the ACP safe harbor unless you are also satisfying ADP safe harbor (e.g., with 3% non-elective employer contribution).

I fixed match required by the document can exceed 4% of compensation and still satisfy ACP if it meets the other requirements in the code.

It's a discretionary match that can't exceed 4% of compensation and still satisfy ACP.

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