Compensation for Calculating Safe Harbor Non Elective 3% Contribution

For a plan that chooses to pay in the Safe Harbor 3% Non-Elective contribution on a payroll basis, are they required to "calculate" the contribution based on annual compensation and thus need to do a "true-up" each year?  I seem to be finding evidence that for the Safe Harbor Matching contribution you can choose to calculate and deposit it based on a payroll basis (as long as it's chosen/defined in the plan document).   I've read the Treas. Reg. 1.401(k)-3(c)(5)(ii).  I would like to confirm that for the Safe Harbor 3% Non-Elective Contribution the IRS currently does not allow an employer to calculate it on a per payroll basis?

Thanks for your help!

It generally isn't an issue for a 3% SHNEC.  With match you have more variables that can cause significant differences between payroll  calculations and annual calculations.  If you take 3% on a payroll basis, it should add up to 3% on an annual basis.  You might have penny adjustments for rounding, but that's about it.  The bigger problem when doing it on a payroll basis is making sure you have a backstop for the comp limit.  In other words, if they are simply doing 3% of payroll comp, make sure you have measures in place to cap it at $8,400 (3% of $280,000).  

I agree with RatherBeGolfing - there really shouldn't be any true-up. There might be a few things that create a true-up (such as health insurance premiums for 2% s-Corp shareholders, but those are not super common). 

The SH nonelective can be calculated and deposited each pay period, but the final calculation should be on an annual basis. The deposit frequency can be more often than the actual annual calculation / accrual.

the FT William document has the following language. the key point being the last NOTE

yes, you can do an allocation other than annual BUT any other choice than annual (end of the year) might cause a violation of the regs. I would say that implies a possible catch-up just in case  the 3% wasn't allocated over the whole year (or from date of participation)

22.  Allocation of Profit Sharing Contributions

a.     Profit Sharing Contributions are allocated to Participant Accounts at the following time(s):

i.      [ X ]  End of Plan Year

ii.    [  ]  Semi-annually

iii.   [  ]  Quarterly

iv.    [  ]  Each calendar month

v.     [  ]  Each pay period

b.     Minimum and Maximum Profit Sharing Allocations

i.      [  ]  Allocations of Profit Sharing Contributions for a Participant shall be subject to a minimum amount:            

ii.    [  ]  Allocations of Profit Sharing Contributions for a Participant shall be subject to a maximum amount:           

NOTE: Any service requirements specified in D.12 through D.15 shall be applied pro rata to the period selected in this D.22a. Any last day rule specified in D.12 through D.15 shall be applied as of the end of each period selected in this D.22a.

NOTE: Selection of D.22a.ii through D.22a.v may result in the Plan not meeting a Code section 401(a)(4) safe harbor allocation formula within the meaning of Treas. Reg. 1.401(a)(4)-2(b)(2).

Multiplication is associative

Thanks everyone!  Yes, it is a very large plan with LOTS of employees over the comp limit. 

Just confirming that although it's deposited on a payroll basis the regs require the Safe Harbor 3% Non-Elective Contribution to be "calculated" annually. 

Agree that it SHOULD come out ok, but it's these "fun" plans where it's not always the case....

20 hours ago, Earl said:

Multiplication is associative

I think we're really illustrating the distributive property:

3% x (pay 1 + pay 2 + pay 3 + ... + pay 52) =

(3% x pay 1) + (3% x pay 2) + ... + (3% x pay 52)