Safe Harbor Matching Contribution Forula Question

[Guest Gibson]

Can a safe harbor 401(k) plan matching formula be structured as follows: 100% of the first 3% of compensation deferred, and 50 cents on the next 3% of compensation deferred (all of which will be matched on a payroll period basis); plus a year-end discretionary match of an additional 50 cents on deferrals above 3% of pay nd up to 6% of pay?

In other words, can any portion of the formula be discretionary? The payroll by payroll match satisfies the safe harbor rules, but does the additional match screw the whole thing up?

Alternatively, could the employer make a match of 100% of the first 3% of compensation deferred, and 50 cents on the next 3% of compensation deferred (all of which will be matched on a payroll period basis); plus a year-end match equal to each employees match in excess of 3% of pay (up to 6%) times a discretionary percentage between 0 and 100?

[MWeddell]

You were earning a "thumbs up" or yes response all the way until the last word of your posting.

In other words, yes to your first question, the discretionary match you described does not spoil the ACP safe harbor.

For the alternative, if the discretionary match were limited to 0% - 50% then it would work, but if you match > 50% then, it won't work. If I understand your alternative, the total match is 100% on the first 3% of pay, and > 100% on the next 3% of pay deferred. That violates Section VI(B)(3)(ii) of Notice 98-52 (the pertinent provision of which was not modified by Notice 2000-3) so you will no longer have an ACP safe harbor.

[Guest Gibson]

Would the discretionary match portion be subject to ACP testing?

[Richard Anderson]

All matching contributions would be subject to the ACP test, including the "safe harbor" match, because you failed the requirements of Notice 98-52, section VI.B.3. The "safe harbor" match you describe will meet the requirements for ADP safe harbor, but not ACP safe harbor.

[MWeddell]

I agree with Richard Anderson's post, assuming we're still talking about the alternative from the first post in this thread and we're talking about a year in which the discretionary contribution was > 50% so that the ACP safe harbor conditions were violated.