Safe harbor - Employee Contributions

[PMC]

Under the safe harbor rules, employee contributions still have to satisfy the ACP test. Suppose a 401(k)plan is safe harbor and the Plan matches employee deferrals and/or employee after-tax up to 5% of compensation using the Basic Matching formula.

What if 4 out of 5 HCEEs make deferrals but 1 HCEE makes after-tax only. No NHCEE makes any after-tax. The plan would satisfy ADP and those HCEEs making deferrals up to 402(g) would be O.K. but what about the HCEE who is making after-tax and getting matched on their after-tax? Those after-tax would have to be tested under ACP and since this HCEE is the only one, wouldn't it fail and require a return? What am I missing? Seems odd that is what is intended but didn't see anything specific in 98-52 or 2000-3.

[Guest SeanT]

I think this is answered in 2000-3 (Q-5):

"A plan will not fail to satisfy the requirements of Notice 98-52 (ACP test safe harbor) merely because the plan provides matching contributions on both elective contributions and employee contributions if, under the terms of the plan, either (1) the matching contributions provided on an employee's elective contributions are not affected by the amounts of the employee's employee contributions, OR (2) matching contributions are made with respect to the sum of an employee's elective and employee contributions under the same terms as matching contributions are made with respect to elective contributions."

Number 2 sounds a lot like the situation you have with your client. Q-5 also has a good example that you may want to read.

[Alf]

In a non-safe harbor plan, after-tax contributions are included in the ACP test with matches. If the requirements cited by Phillip are met, you should get an ACP pass for the match AND the after-tax. If the after-tax wasn't included in the match calculation so that it didn't meet those rules, the after-tax would have to pass ACP by itself and it would fail on the facts you mentioned.

[Richard Anderson]

If I understand the prior posts correctly, then I disagree.

After tax contributions will always have to be tested. And, if the only after tax contribution is made by a HCE, it doesn't pass.

If the conditions are met, then the match on an after tax contribution does not cause the plan to fail the safe harbor, but the post tax contributions must pass the ACP separetely.

[PMC]

Richard, that's how I read it but does that make sense? 4 HCEs contribute 5% of their compenation and get a match based on their contribution but the one HCE that makes an after-tax equal to 5% gets matched, Plan passes ACP with respect to the match, but it fails ACP for the employee after-tax because the employee wanted to put in after-tax instead of before-tax.

Or is there some reading of the Notices that could be interpreted to say that, the portion of the employee's after-tax that is being matched with a safe-harbor match, doesn't have to be tested under ACP?

Sean, is that what you're saying Q & A 5 from 2000-3 says? Isn't that question just referring to bpassing the ACP with respect to the employer match and doesn't deal with passing ACP with respect to after-tax?

[Guest Jeff V]

We went to safe harbor in 2001 and our interpretation was that if HCE's were allowed to contribute after-tax, we would have to perform the ACP test on combined ee after-tax and employer. So, we amended our plan to only allow NHCE's to save on an after-tax basis. Prior to safe harbor, our HCE's were only permitted to save 5% pre-tax so as to prevent failing the ADP test. Now they can save the full 15% allowable under our plan, pre-tax.

[Richard Anderson]

Unless the plan also matches on post tax contributions, then the post tax contribution does not affect the ACP safe harbor, but the safe harbor is only for matching contributions. The post tax contributions must be tested separately.

If the plan also matches on post tax contributions, then the match on the post tax can be safe harbor, if the requirements are met. But the post tax contribution itself must be tested.

Jeff V,

It's hard enough getting NHCEs to defer pre-tax; are many taking advantage of the post-tax deferral? Are the ones deferring post-tax, first deferring the 15% pre-tax limit?