Q. A safe harbor 401(k) satisfies the safe harbor ADP and ACP tests with a 3% nonelective contribution. If this plan has a fixed rate of match written into the plan document that provides a match of more than 4% of compensation, will it satisfy the ACP safe harbor?

A. As long as the matching formula does not match deferrals that exceed 6% of compensation, the match will satisfy the ACP safe harbor. However, if the matching formula was discretionary, there would be an allocation limit of 4% compensation for the match to satisfy the safe harbor.

Q. Is the use of total compensation required when calculating the safe harbor 401(k) nonelective contribution?

A. The Internal Revenue Code does not mandate a compensation definition for this purpose. But IRS guidance states that the compensation to be used must satisfy the 414(s) definition of compensation. This guidance is satisfied by the 3401(1), 6041, 6051, and 415 definitions in our Basic Plan Document #01. Thus, any definition of “compensation” selected in our adoption agreement is satisfactory for calculating the safe harbor contribution.

In addition, Section 414(s) does not preclude modifications to the plan’s definition of compensation (such as the elimination of bonuses, commissions, etc.), provided the revised definition passes the “compensation inclusion ratio test.” (This is “Demo 9” on the plan determination submission package).

Also of interest is that a plan document is allowed to limit the eligible compensation to the period of plan participation. For example, if a plan has semi-annual entry dates and a participant entered the plan on July 1, the plan may be written to limit compensation fro that participant to the period from July 1 to December 31 of the year the participant entered the plan.

Q. May a safe harbor plan accept Roth 401(k) contributions?

A. Yes. However, the Final Roth regulations require that a designated Roth contribution and the safe harbor match made based on that contribution be accounted for separately.

Q. Safe Harbor 401(k) With Additional Matching Contributions

A. Within limits, a safe-harbor plan may make an additional non-safe harbor matching contributions without triggering the actual contribution percentage (ACP) test, as long as:

• The discretionary matching contributions do not exceed 4% of compensation,
• The matching contributions are not made on deferrals that exceed 6% of a participant’s compensation, and
• The rate of match for any HCE is not more than that of any NHCE.
• Rate of match does not increase as rate of deferrals increase.

Failure to comply with these restrictions will require the plan to run an ACP test. It is possible for a plan to be exempt from the ADP test but be required to run the ACP test for failure of any of the above items.

The final 401(k) and (m) regulations state that, to remain exempt from ACP testing, all matching contributions must be allocated on a nondiscriminatory basis. Placing an allocation restriction, such as a last-day rule or a 1,000 hours-of-service requirement, on any matching contribution provided by the plan is discriminatory unless all non-highly compensated participants satisfy the restrictions.

Example: A safe harbor 401(k) plan with a 3% qualified safe harbor nonelective contribution (QNEC) and a discretionary match of 50 cents on a dollar up to 6% of deferred compensation will satisfy the actual deferral percentage (ADP) safe harbor test. There are 35 participants. 30 of whom are non-highly compensated employees (NHCEs) while five are highly compensated employees (HCEs). The plan has not made matching contributions in excess of 6% or allocated a discretionary match of more than 4% in total. However, the plan has a last-day and a 1,000 hours-of-service requirement applicable to the discretionary match. Three NHCEs left employment before the last day of the year and although 4 NHCEs were employed on the last day of the year they did not satisfy the 1,000-hours-of-service requirement. All five of the HCEs were employed on the last day of the year and all satisfied the 1000-hours-of-service requirement. All five HCEs would receive a 3% match. Only 23 of the 30 NHCEs would receive a 3% match. The final regulations made clear that this would result in a discriminatory allocation requirement and, thus, the ACP test would be required to be run. The surest way to avoid the ACP test in a safe harbor 401(k) plan is to eliminate allocation requirements on the discretionary match.

Q. How is a 401(k) Safe Harbor plan provision added after the plan is restated and amended for GUST?

A. Prior to the GUST approved document, a Board Resolution was all that was needed to make a 401(k) plan into a 401(k) Safe Harbor plan. As of the GUST plan document, in order to add 401(k) Safe Harbor provisions to a plan, the board resolution needs to be followed up by a plan amendment in which the Safe Harbor 401(k) provisions are added to the plan.

Keep in mind that in order to stop the required Safe Harbor 401(k) contributions, the plan must be amended to remove the Safe Harbor 401(k) provisions.

Q. Can the Safe Harbor 401(k) plan use the Safe Harbor 3% non-elective contribution (NEC) to satisfy both the ADP and the ACP test?

A. If the discretionary match formula does not exceed 4% of compensation and there is no match of deferrals in excess of 6% of compensation, both the ADP and ACP tests will be satisfied by the Safe Harbor 3% NEC.

Q. May a Safe Harbor 401(k) matching contribution be used to satisfy the Top Heavy minimum contribution for a plan if only non-key employees who defer receive it?

A. If the plan ONLY provides for elective deferrals and Safe Harbor matching contributions, the plan is exempt from the top-heavy rules and thus, no additional contribution will have to be made to those who do not defer.

Operational caveat: the model EGTRRA Amendment must be completed to indicate that the Safe Harbor Matching contribution is being used to satisfy the top-heavy minimum.  This EGTRRA provision amends the top heavy rules of the GUST document by permitting the safe harbor matching contribution to be used to satisfy the top heavy requirements instead of a specific contribution.  This is from EGTRRA Section 613.

Q. What are the requirements for providing a brand-new plan with a safe harbor notice? What about providing that notice to a brand-new employee?

Timing for providing a safe harbor 401(k) notice for a brand-new plan or to a new participant

Brand-new plan 
A brand new 401(k) plan is established with safe harbor provisions. The plan has immediate eligibility provisions and entry date coinciding with the effective date of the plan for deferrals and employer contributions. The plan will need to provide the safe harbor notice at anytime between 90 days before the effective date of the plan and up to the actual effective date of the plan.

Example: An employer is adopting a safe harbor 401(k) plan effective September 1, 2007. The plan design provides for immediate eligibility and entry to make deferrals and to receive the safe harbor matching contribution. The employer must provide the safe harbor notice between June 3, 2007 and September 1, 2007. Thus, a new plan can provide the notice as late as the actual effective date of the plan.

Newly eligible participant in an existing safe harbor 401(k)
When must the safe harbor notice be provided to a new participant in an on-going plan?

A newly eligible participant in an existing safe harbor 401(k) may be provided with the safe harbor notice under the same timeframe as applicable to a new plan.

Example: An employer who sponsors a safe harbor 401(k) with a 6 months of service eligibility requirement hired a new employee on March 31, 2007. This employee will enter the plan on October 1, 2007. The employer must provide the safe harbor notice no earlier than July 3, 2007 and not later than October 1, 2007.

Note: There is a special rule to coordinate with the annual safe harbor notice timeframes.

Specifically, for safe harbor notice purposes, a new employee is defined as an individual who becomes eligible after the 90th day before the beginning of the plan year. Thus, in a calendar year plan any employee who becomes eligible to participate between October 2 and December 31 would be provided with a safe harbor notice under the new employee rules. Specifically, no sooner than 90 days before the eligibility date and no later than right up to the date of eligibility.

Thus, the annual safe harbor notice sent between October 3 and December 2 each year (between 90 and 30 days before the beginning of the plan year) would cover all on-going participants. The same notice would cover newly eligible employees through the date it was provided. For those new employees who become eligible within the last 90 days o f the plan year, the annual safe harbor notice may be used to satisfy those who are newly eligible, right up to the last day of the year.

To learn more about safe harbor 401(k) plans, click here for information about our eSeminar on safe harbor 401(k) plans and SIMPLE plans.