Required True up for Safe Harbor 3% contribution.

[Guest GMedley]

We have several clients who use the 3% QNEC to meet the safe harbor requirements exempting them from the ADP/ACP test. I still always check that they really did put in 3% for all employees. I often find they don't, for various reasons, resulting in awkward year end person by person true up. I notice in IRS notice 2000-3, that no year end true up is necessary for the safe harbor match, if is is made on a payroll, monthly or quarterly basis. Does anyone know if this can apply to the 3% QNEC as well? Does anyone have a grasp on how picky the IRS is about having eveyone match exactly 3%?

thanks.

[Bill Berke]

The IRS will be very picky. This is a mandatory benefit required under the law (IRC 401(k)safe harbor). The true up must happen. If your document requires safe harbor match during the year, then the employer must adjust its procedures to avoid a repeat of the true up timing problem. If the plan is silent, or if the true up is required only at the end of the year, then you would not have any problems. The true up would be deductible under the usual deduction rules

[Guest]

it is not really a QNEC, there is no term for the Safe Harbor Non-EleCtive (a SHNEC?). one difference is that you can use the safe harbor in the a(4) test, you could limit the QNEC to only actives, and you cant do that with a SHNEC,

it is quite possible that a 3% QNEC still might not pass ADP testing whereas a SNHEC is guarenteed, etc.

Bill is correct, true up is required for the non elective, but not necessarily (depending on how document is worded) on the match.

[Bill Berke]

To GMedley - I forgot to mention that you must follow the document - "follow the terms of the plan". If monthly is in document, then monthly it must be. I was referring to APRSC (or whatever it's called now) regarding changing procedures to avoid not following the terms of the document. I always insist that a document have annual match to 1. avoid this particular problem, and 2. I love a last day clause so I can amend during the year without having to worry about hours, to give employer flexibility and to reduce costs.

To Tom - SHNEC I love it, may I use it in the classes I teach?

[Guest GMedley]

Thanks very much. You guys are a big help.

Grant

[Guest]

Bill:

I have no patent on the term SNHEC. maybe it will catch on. ugh.

while I prefer last day clause, match is a real pain if client insists on putting in monthly AND allocating to participants accounts BUT retaining the last day option.

[Bill Berke]

Tom, I have had great success showing clients that setting up a bank account in the company name and depositing the "match" money in this account will accomplish the goal of getting the money out of the company so they can manage their cash-flow. The cash-flow issue is usually the reason I've encountered for wanting to do the match "as you go". Unless some commissioned saleperson is trying to get money under management early. I've also found that it is easy and appreciated to show the benefits of a last day clause. So with the added benefits of a last day clause and having all the required match money at the end of the year in this "cash-flow" account, as I said, I've had no problems.

Regarding SHNEC, some years ago I was an advisor to the IRS and during a meeting, when the 401(k) reg's first came out, I used the expression QNEC. I was immediately chastised and reminded that in the reg's the expression is QNC -"quink". Of course, we all know what happened to quink.