Abusing the match safe harbor: Does low NHCE participation result in

[Guest michaelv]

While doing some reading about the safe harbor non-elective contribution and the safe harbor match, it seems that all participants eligible to make 401(k) contributions would get the 3% s/h non-elective, while the match s/h contribution would only go to those participants who are actually deferring. Is this correct?

If so, couldn't that lead to an employer actually being better off with low NHCE 401(k) participation. For example, if there are 100 NHCE's in the Plan, and only 10 make 401(k) contributions, the employer would only put in match s/h contributions for those 10 people. Also, if 5 of those 10 NHCE's are deferring less than 5%, then the employer does not have to put in the full 4% contribution.

Surely I've misread something about safe harbors, because the above doesn't seem "right".

Same topic, different question: Do the safe harbor contributions apply only to NHCE's, or can they also be given to HCE's?

[R. Butler]

Safe harbor matching contributions are only made to those employees that actually defer. Safe harbor nonelcetive contributions are given to all eligible participants regardless of whether or not they defer. Also, safe harbor contributions are given to bboth HCE's and NHCE's

It is possible that if participation is low the safe harbor match will be a less expensive alternative, but it really isn't that simple. There are other considerations. Is the plan top heavy? The nonelective contribution satisfies top heavy minimum requirements, whereas the match does not. The nonelective contribution can be used in cross-testing.

I guess in short you seem to understand the safe harbor contribution basics, but your conclusion isn't necessarily correct. There are several considerations relevant to determining whether to use a safe harbor match or a safe harbor nonelective contribution.

[Guest michaelv]

I'm clear on what you've said. However, the specific situation I'm looking at has about 500 participants, 480 of which are NHCE's. Of this 480, only about 70 deferred. All 20 HCE's deferred.

Ignoring top heavy for a moment and just comparing the dollar amounts involved between the 2 safe harbor options, wouldn't it be a lock that the match safe harbor SHOULD be much, much less, since it would be given to 90 people rather than giving the PS s/h to 500 people?

I realize that by making the s/h announcement at the beginning of the year, it is likely that some of the 410 non contributors will jump on board, increasing the amount of match required by the employer.

Finally, do terminees get a contribution under both safe harbors?

Thanks for any comments.

[R. Butler]

Safe harbor plans cannot impose a last day requirement as a condition for getting the safe harbor contribution regardless of whether the match or nonelctive contribution is elected.

If we totally disregard top heavy requirements you are likely to be correct that the match is cheaper. However, I will just caution you not to disregard top heavy. Also, consider if participation can be increased merely by adding a match, or tweaking an existing match. May be able to pass ADP/ACP without safe harbor.

[Guest michaelv]

Good advice. Thanks for the information.