Different Matching Contribution For Different Employees Question

Sorry for all of the questions lately.  We have a client who does a flat 4% Safe Harbor Match who is looking to bring in a new group of employees.  For this new group they want to give them the same 4% match long-term, but for the first year they want to give them a 7% match.  Is that something that we can even do, if it passes the necessary ACP testing?  Or is it not even possible to do since the match is a Safe Harbor?  

I guess can we give only certain employees a 3% discretionary match but not everyone (assuming it passes the necessary testing)?

Any chance the plan has the flexibility to do a 3% profit sharing for individual groups at the employers discretion?

On 4/5/2025 at 5:25 PM, Bill Presson said:

Any chance the plan has the flexibility to do a 3% profit sharing for individual groups at the employers discretion?

We have it in there yes, but wouldn't doing it for a few and not everyone cause different testing issues?

Maybe I'm overthinking it.

1 hour ago, metsfan026 said:

We have it in there yes, but wouldn't doing it for a few and not everyone cause different testing issues?

Maybe I'm overthinking it.

If they aren’t HCEs or Key, I don’t see any testing issues. 

@metsfan026 your suggested approach of using a discretionary match is the simplest approach in terms of implementing and communicating to employees, and as you noted, assuming it passes necessary testing.

There are many paths to getting to (or very close to) the desired result, and the more steps needed for a path to work, there is an increasing risk of introducing operational issues when defining eligibility for who gets the additional match or contribution, when they get it and how much they get.  Part of the conversation should involve an assessment of the risks.  For example, a match and a profit sharing contribution are tested separately for coverage (unless using ABT which has its own issues like the nondiscriminatory classification test).

A starting point is to know (or have a very good estimate) of the number of HCEs that are in the new group.  If there are none, use discretionary match approach and appreciate the simplicity. If there are very few HCEs in the group, consider the impact of excluding them from getting the one-time bump in the match rate.  There may be ways to keep things calm with a bonus unrelated to the plan.

If there are a lot of HCEs in the group, then get as complete a census as possible to be able to model the alternative paths.  At this point, you need to let the client know of the potential complexity of the paths forward and that you will charge a fee for these services.  Start with the discretionary match.  If that isn't workable, try the profit-sharing formula (although if the match didn't work, this approach will likely have similar compliance issues).  If neither the match or profit-sharing approaches aren't workable, likely it will be do to coverage, so consider the cost of adding in additional NHCEs who were in the new group but not deferring into the calculations.

The worst case scenario is implementing an approach without considering the potential compliance risks and finding out after the fact that the plan fails a compliance test.  The cost of correction will almost certainly exceed the cost of making an informed decision beforehand.

6 hours ago, Bill Presson said:

If they aren’t HCEs or Key, I don’t see any testing issues. 

Adding any contribution other than the SH contributions remove the Top Heavy protections.

@metsfan026 is this new group new employees?  Or established employees who weren't eligible for the plan to begin with?  If they are brand new employees, unless they are owners or family members of owners, they probably won't be HCEs.  So a PS might be the way to go.

On 4/7/2025 at 4:29 PM, BG5150 said:

Adding any contribution other than the SH contributions remove the Top Heavy protections.

 

@metsfan026 is this new group new employees?  Or established employees who weren't eligible for the plan to begin with?  If they are brand new employees, unless they are owners or family members of owners, they probably won't be HCEs.  So a PS might be the way to go.

They are purchasing another employer and looking to give service credit for their prior time