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Can a Safe Harbor Non Elective Plan still be exempt from testing if they contribute more than 3%?


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Posted

Is there a cut off on how much can be contributed before it is not longer exempt from testing for safe harbor non-elective?

I know for safe harbor match anything above 6% will then need to be tested for ADP ACP and Top Heavy so I was not sure if the same rules applied for Safe Harbor Non Elective 

Posted

1.401(k)-(3)(b) reads:

"(b) Safe harbor nonelective contribution requirement

(1) General rule. The safe harbor nonelective contribution requirement of this paragraph is satisfied if, under the terms of the plan, the employer is required to make a qualified nonelective contribution on behalf of each eligible NHCE equal to at least 3% of the employee's safe harbor compensation."

I did not find a reference to any maximum percentage.  Apparently, you can give NHCEs as much fully-vested, restricted-withdrawal safe harbor non-elective contributions you want subject to regulatory 415 and annual additions limits.

Assuming this is true, it does lead to a question of whether every NHCE must receive the same percentage, or could the SHNEC percent vary among the NHCEs as long as no one gets less than 3%.

Posted

If the only nonelective contribution is an even percentage of compensation for all participants, that formula meets the requirements of the 401(a)(4) design-based safe harbor. There is no maximum under 401(a)(4), but of course the 415(c) limit and 404(a)(3) maximum deduction limit need to be considered.

Free advice is worth what you paid for it. Do not rely on the information provided in this post for any purpose, including (but not limited to): tax planning, compliance with ERISA or the IRC, investing or other forms of fortune-telling, bird identification, relationship advice, or spiritual guidance.

Corey B. Zeller, MSEA, CPC, QPA, QKA
Preferred Pension Planning Corp.
corey@pppc.co

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