Additonal match contribution on top of safe harbor match?

[R. Butler]

This issue has been discussed before, but I'm not following the responses very well. We have a safe harbor 401(k) plan that uses a $1 for $1 match up to 4% to meet safe harbor. Can an additional subject to vesting match also be given? From reading responses to prior inquiries the answer is yes, but I am not following the logic. Notice 98-52, Section VI.B.4.b states that a plan fails to satisy ACP safe harbor if the plan provides for matching contributions that could exceed 4% of compensation. Its seems to me that the safe harbor provision eats all that up and there can't be an additional match. What am I missing?

[Kristina]

Perhaps you are missing that any match over an above the 4% you reference would be still be subject to ACP testing.

[Bob R]

The key to the provision you referenced (which is at the bottom of this message) is that it applies to "matching contributions made at the employer's discretion." What that means is that if the employer has a discretionary match, as distinguished from an actual matching formula stated in the plan, then the total discretionary match can't exceed 4% of compensation.

The net result is that a plan satisfies the ACP test if: 1) there is an ADP safe harbor contribution (in your example it's the safe harbor match) 2) matching contributions do not take into account deferrals over 6% of compensation and 3) if the plan has a discretionary match, then the discretionary matching component can't exceed 4% of compensation.

For example, let's say the safe harbor match is 100% on deferrals up to 4% of compensation. This is fully vested and subject to the distribution requirements. That satisfies the first requirement.

Then, let's say the plan provides -- in the document -- that there is another match equal to 200% (that's high but there's nothing preventing it) of deferrals up to 6% of compensation. That match is subject to a vesting schedule and employment at the end of year/1000 hours. That satisfies the second requirement -- i.e., the match doesn't take into account deferrals over 6% of compensation. It's worth noting that because of this 6% limit, if the safe harbor match was 100% on all deferrals (rather than 100% on deferrals up to 4%) you'd satisfy the ADP safe harbor but you wouldn't satisfy the ACP safe harbor.

Last, the plan provides that the employer has the discretion to make an additional matching contribution. However, in applying that additional match, only deferrals up to 6% of compensation will be taken into account and the maximum match any participant can receive from this discretionary match is 4% of compensation. This match is subject to a vesting schedule and EOY/1000 hours. This satisfies the third requirement.

A plan that includes these 3 matching contributions would satisfy the ADP and ACP safe harbor provisions.

From Notice 98-52:

A plan fails to satisfy the ACP test safe harbor for a plan year if the plan provides

for matching contributions made at the employer’s discretion on behalf of any employee

that, in the aggregate, could exceed a dollar amount equal to 4 percent of the employee’s

compensation. This limitation on matching contributions made at the employer’s

discretion does not apply to plan years beginning before January 1, 2000.

[Guest]

while such plan may pass safe harbor, it is doubtful the contribution would be fully deductible.

6% deferral + 4% safe harbor match has already used up a good chunk of the 15% deductible limit. remember the 6% reduces the total comp. - granted, not everyone will defer, but watch out...

[Guest SeanT]

In the event that a safe harbor plan has been designed to match deferrals in excess of 6% of comp., how would those contributions be tested for ACP purposes?

I'm assuming that full year compensation would be used as the denominator (depending on the plan's definition of comp.) and the matching contributions each participant received on comp. in excess of 6% would be used as the numerator.

An additional question: what about the matching contributions above the safe harbor formula that are still below 6% of comp.? In other words, the plan's safe harbor formula is $1 for $1 up to 4% of comp., but then the discretionary match formula kicks for deferrals in excess of 4% and matches $.50 on the dollar for the next 4% (cap at 8% of comp).

Everything I've read states that only discretionary match contributions in excess of 6% of comp. are subject to ACP testing..... what about the matching contributions between 4% and 6%? Are these not subject to testing?

Just wondering if anyone has had to perform ACP testing on a similar situation?

[Richard Anderson]

If matching contributions are made on deferrals in excess of 6% of comp, then the plan cannot rely on the ACP safe harbor, and must pass the ACP test by including all matching contributions, including the safe harbor match.