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Safe Harbor Match by Payroll - failing compensation ratio test


ekg24

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I have a Safe Harbor Basic Match plan with only 401(k) and SHM contributions (calculated by payroll). The plan excludes commissions - and fails compensation ratio test (3.52%). I'm not sure how to handle it from here.

 

Thanks!

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I like Lou's idea.  but wonder......

Is there any thought that because the payroll-period SH match on the commissions would not have been deposited quarterly as is typically required, that somehow the adjustment now also has to include earnings from what would have been those "end of following quarter" deadlines?

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I'd also be concerned that the change to the method used to calculate the safe harbor match would have to be disclosed in an updated safe harbor notice. Which obviously you can't do after the end of the year, so it would be impossible to make this change and retain the safe harbor. The result being that you lose the safe harbor and have to be ADP/ACP tested if you fail the 414(s) test.

Free advice is worth what you paid for it. Do not rely on the information provided in this post for any purpose, including (but not limited to): tax planning, compliance with ERISA or the IRC, investing or other forms of fortune-telling, bird identification, relationship advice, or spiritual guidance.

Corey B. Zeller, MSEA, CPC, QPA, QKA
Preferred Pension Planning Corp.
corey@pppc.co

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I agree with Corey. You lose SH and do ADP/ACP testing using gross comp (or some 414(s) compliant definition) as your testing comp. If this was a DB or PS that otherwise had a safe harbor formula but failed nondiscriminatory compensation you would need to general test using a 414(s) comp, and ADP/ACP are the "general test" versions for 401(k) and 401(m).

Kenneth M. Prell, CEBS, ERPA

Vice President, BPAS Actuarial & Pension Services

kprell@bpas.com

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I am having one of those end of the day moments:

401k plan may limit type of compensation from which participants may defer to a reasonable definition of compensation.  Definition does not need to pass compensation ratio test.  Matching is based on deferal amount, not compensation, so is there an issue if a safe harbor match plan fails the compensarion ratio test?

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The plan is safe harbor. I don’t have the plan document, but I doubt it has something that says you are not safe harbor when the compensation definition fails 414(s). So unless the document requires it, you don’t run ACP testing. Instead, the plan loses its nice tax-qualified status, that’s all.

You then wonder why you got rid of an ACP test in exchange for a 414(s) in the first place.

You can’t just retroactively tell everyone with commissions that you are now going to retroactively include commissions for the match and say “We sure hope you deferred enough under the old compensation definition so that now with this new definition you will retroactively get the full match. We’re sure your deferral election would have been the same if you knew this beforehand.”

Maybe EPCRS has changed and I missed that this is now available to be self-corrected? I admit, that is possible so I’ll be happy to hear about it.

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A plan does not lose safe harbor status.  It has a failure that needs to be corrected.  Follow the terms of the plan document. 

Assuming you have a pre-approved plan document, and this plan was designed to be an ADP/ACP safe harbor, the document certainly says that the plan will satisfy ADP/ACP testing by satisfying the safe harbor requirements.  It must still do that - in a nondiscriminatory way. 

I bet somewhere in the plan document (buried in the BPD section on safe harbor contributions) it also says that the SH contribution must be based on a nondiscriminatory (not just reasonable) definition of comp. If the plan didn't do so, it has an operational failure that needs to be corrected by doing what it is supposed to do (no -11(g) amendment as this isn't a nondiscrimination or coverage failure, it was an operational failure). 

The plan should recalculate the match based on a nondiscriminatory definition of comp. (and I would do an annual/true-up allocation since the correct periodic match wasn't deposited by the end of the following quarter). That'll be in the BPD as well.

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