OR: MATCHING CONTRIBUTION A. OR B. BELOW

A. BASIC MATCH: 100% of first 3% deferred plus 50% of next 2% deferred

1. No Allocation Requirements may be imposed, such as, a 1,000 hour or last-day requirement
   
2. 100% Vested
   
3. Not available for in-service withdrawal before age 59½, even for hardship (EESA exceptions apply)
   
4. Can be used to satisfy Top-Heavy minimum contribution
   

B. ENHANCED MATCH: Matching formula must be at least as generous as the basic formula

1. No Allocation Requirements may be imposed, such as, a 1,000 hour or last-day requirement
   
2. 100% Vested
   
3. Not available for in-service withdrawal before age 59½, even for hardship (EESA exceptions apply)
   
4. Can be used to satisfy Top-Heavy minimum contribution
   
5. Rate of match may not increase as deferral percentage increases

NOTE: The top-heavy minimum contribution may be waived on an annually determined basis for plans using either the safe harbor basic or enhanced matching formula, provided there is no allocation of any other employer contributions, including reallocation of forfeitures. Such a plan would actually be exempt from the top-heavy rules for the year

1. Allocation of any discretionary matching contribution cannot exceed 4% of compensation
2. Participant elective deferrals in excess of 6% of compensation are not matched
   
3. Rate of match does not increase as deferral percentage increases
   

Unlike the Basic or Enhanced Match, a Non-safe harbor additional match:

1. Does not need to be 100% vested
   
2. May permit in-service withdrawals
   
3. However, under the final 401(k) and 401(m) regulations, a plan cannot impose a 1,000-hour or last-day allocation requirement on any non-safe harbor match, unless all the non-highly compensated employees meet the allocation requirements.
   

Note that if the plan provides for voluntary after-tax contributions, an ACP test must be run.

1. New Safe Harbor 401(k) Plan Issues:
   

   a.	A safe harbor 401(k) feature may not be added to an existing profit sharing plan with less than 3 months remaining in the plan year.
   b.	A brand new 401(k) plan must have at least 3 months remaining in the short plan year to immediately start a safe harbor. For example, by October 1 for a calendar year plan.
   c.	An exception to the 3 month rule exists for a completely new business. Such entities may establish a safe harbor plan with as little as one month in the plan year.

2. A safe harbor feature may not be added to an existing 401(k) plan during the plan year. The plan may be amended to add the safe harbor as of the first day of the next plan year.
   
3. A notice must be provided to each eligible plan participant each year within a reasonable time before the next plan year begins. A period of between 30 and 90 days before the beginning of the plan year is deemed to meet the "reasonable time" requirement. See the safe harbor notice requirements section below for more information. If the flexible nonelective safe harbor contribution will be made, a second notice must be provided 30 days before the end of the plan year if the plan will actually be providing the flexible contribution.
4. As of 2006, the final 401(k) and (m) regulations introduced short plan year exceptions that will apply to safe harbor plans (see below).

There has always been the ability to stop the safe harbor matching contribution during the year. To do so:

1. The plan is to be amended to remove the safe harbor matching provision.
2. The employees are to be provided a notice 30 days in advance of the safe harbor contribution being discontinued.
3. The employees must have a chance during the 30-day period to change their deferrals.
4. Although safe harbor matching contributions are made for a portion of the year, ADP and ACP testing will apply for the entire year.

Prior to the proposed regulations issued May 18, 2009, there was no way to stop the safe harbor guaranteed NEC during the plan year, other than to terminate the entire plan. Effective immediately on May 18, 2009, a plan may reduce or eliminate the safe harbor NEC during the plan year, provided the following steps occur, and provided the employer has a substantial business hardship as defined in Code Section 412(c). To do so:

1. The plan is to be amended to remove the safe harbor NEC provision.
2. The employees are to be provided a notice 30 days in advance of the safe harbor contribution being discontinued.
3. The employees must have a chance during the 30-day period to change their deferrals.
4. Prorate the 401(a)(17) compensation limit
5. Although safe harbor contributions are made for a portion of the year, ADP and ACP testing will apply for the entire year.

The proposed regulations also provide that the supplemental notice requirement is satisfied if each eligible employee is given a notice that explains:

1. the consequences of the amendment reducing or suspending future safe harbor NECs;
2. the procedures for changing CODA elections; and
3. the effective date of the amendment.

The reduction or suspension may be effective no earlier than 30 days after the notice is provided to all eligible employees. For a plan that is amended to reduce or stop the safe harbor contribution mid-year, when the safe harbor contribution is calculated for the portion of the year that it is to be provided (from the beginning of the plan year until 30 days after the notice is provided); the $245,000, 401(a)(17) compensation cap, must be prorated.

For example, a calendar year plan employer amends the plan to eliminate the safe harbor nonelective contribution, provides the supplemental notice to the employees and in this example the 30th day after the notice is June 30, 2009. The employer would have to make the safe harbor NEC from January 1, 2009 until June 30, 2009. When calculating the 3% safe harbor nonelective for the 6 months, the compensation cap for the calculation is to be prorated for the 6 of 12 months, thus the prorated compensation cap for this example is $122,500.

Further, since the safe harbor contributions were not made for 12 months, the plan will be subject to the top heavy rules of section 416. see below.  Also, to reiterate, the plan is subject to ADP and ACP testing for the entire year.

The business must be incurring a substantial business hardship as defined in Code Section 412(c):

"For purposes of this section, the factors taken into account in determining temporary substantial business hardship (substantial business hardship in the case of a multiemployer plan) shall include (but shall not be limited to) whether or not—

(A) the employer is operating at an economic loss,
(B) there is substantial unemployment or underemployment in the trade or business and in the industry concerned,
(C) the sales and profits of the industry concerned are depressed or declining, and
(D) it is reasonable to expect that the plan will be continued only if the waiver is granted."

Top heavy issue
If a plan is top heavy and is deemed exempt from the top heavy rules for this year because only deferrals and safe harbor permitted contributions are being made and the safe harbor contribution is suspended, then the plan is subject to the top heavy rules for the year. Thus, if a key employee has made a deferral and/or received a safe harbor allocation, the plan would still have a top heavy allocation requirement for the year. Therefore, suspending the safe harbor NEC may nonetheless leave the employer with a similar contribution requirement in order to satisfy the top heavy rules.

Further, the compensation definition for the safe harbor NEC may be different than the top heavy compensation definition. The top heavy definition is full year compensation with no exclusions. Thus, for an employer with a top heavy plan, it is important for the employer to consider whether stopping the safe harbor NEC is more cost effective than making the top heavy allocation.

1. When a NEC of 3% or more is made to a top-heavy plan, the NEC of 3% or more generally satisfies the top-heavy contribution requirement.*
2. If the plan is making a safe harbor match and the plan is top-heavy, the match counts towards satisfying the top-heavy minimum contribution for those employees who receive it. For example, if a participant defers 2% and receives a 2% match, when the employer makes the top-heavy contributions, that employee would only have to receive 1% more to satisfy the 3% top-heavy contribution. (The employer may want to consider whether counting matching contributions towards the top-heavy minimum is appropriate; since it penalizes participants actually deferring.)
   
3. A plan that only permits elective deferrals and contributions that satisfy the ADP and ACP safe harbor provisions is exempt from the top-heavy rules. To be exempt, there cannot be any other employer contribution (i.e., profit sharing contribution) and forfeitures cannot be allocated on a basis other than as a match that satisfies the ACP safe harbor. To further clarify, discretionary matching contributions that do not trigger the ACP test (as described in c below), may also be made.
   a. elective deferrals, and
   b. safe harbor contributions (the safe harbor NEC or the safe harbor matching contribution), and
   c. a match that satisfies the ADP and ACP safe harbor provisions (i.e. a discretionary match that is less than 4% of compensation and that does not match on deferrals above 6%).
   Keep in mind that to be exempt, there cannot be any other employer contribution (i.e., profit sharing contribution) and forfeitures cannot be allocated on a basis other than as a match that satisfies the ACP safe harbor.

This exemption is determined on an annual basis. Therefore, each year is judged to be exempt or not on its own.

*Caveat: For a new entrant into the plan who receives the safe harbor contribution for only part of the year, i.e. while a participant, the top-heavy contribution should be for the entire year and thus, such a participant would require an additional top-heavy contribution.

Rev. Ruling 2004-13
A safe harbor 401(k) plan that permits immediate or short eligibility for elective deferrals but imposes a longer service requirement for safe-harbor matching contributions will not be exempt from the top-heavy rules.

A safe-harbor 401(k) plan that permits employees to defer before meeting the statutory one-year-of-service requirement, but that requires a longer period of service before being eligible for the safe harbor matching contribution is not eligible for the top-heavy exemption. Since newly-hired NHCEs will not receive the same level of safe harbor matching contributions as longer-term HCEs, the plan does not satisfy the requirements for the top-heavy exemption.

Thus, with no exemption, other longer-term non-key employees who did not defer would now be eligible for the top-heavy minimum. Those who deferred 1 or 2 percent might also be eligible to receive the difference up to the 3% (and would be, if the plan's top heavy minimum is actually 3%.) All this because the employer let new hires defer early. Since staggered eligibility is a normal design method, employers may want to reconsider their plan's eligibility if they will be impacted by this change.

1. A brand new 401(k) plan may be established at any time during the year provided there are at least three months remaining to the plan year.
   
2. New plans include:
   • Brand new plans
   • Existing profit sharing or stock bonus plans that never had a 401(k) feature.
   
3. The exception for a brand new business permits a plan to be established with as little as one month remaining in the plan year.

1. A safe harbor 401(k) plan may have a short plan year in the year the plan terminates provided:

• the termination is in connection with a merger or acquisition involving the employer, OR
• if the employer incurs a substantial business hardship comparable to that described in section 412(d) (for a minimum funding requirement waiver):

• the employer is operating at an economic loss,
  
• there is substantial unemployment or underemployment in the trade or business and in the industry concerned,
  
• the sales and profits of the industry concerned are depressed or declining, and
  
• it is reasonable to expect that the plan will be continued only if the waiver is granted.
  

The employer in either of the above situations will remain safe harbored from testing, provided a safe harbor contribution is made for the short plan year.

2. A safe harbor 401(k) plan may have a short plan year in the year the plan terminates for reasons other than merger, acquisition or hardship, (however, ADP/ACP testing will be required) provided:

• the employer makes the safe harbor contributions for the short period,
  
• the employees are provided with a notice of the change, and
  
• the plan must pass the actual deferral percentage (ADP) test and actual percentage test (ACP). (Since testing is required it really isn’t like a safe harbor plan anymore.)

NOTE: Whether or not the plan passes the ADP/ACP test, the employer must make safe harbor contributions through the plan termination date.

For the record, if the plan provided a safe harbor matching contribution, it would follow the current procedure to suspend the safe harbor matching contributions. This requires a 30-day advance notice to participants, providing the participants with reasonable opportunity to stop deferring, and performing ADP/ACP testing of the short plan year.

3. A safe harbor 401(k) plan may run a short plan year to change from a fiscal plan year to a calendar plan year or vice versa, provided the plan is a 12-month safe harbor plan in both the preceding and following plan years.

Example: A safe harbor 401(k) plan has a plan year of July 1 to June 30. The employer wants to switch to a calendar plan year. The plan provides the 3% safe harbor nonelective contribution for the July 1, 2008, to June 30, 2009, year. The plan is then amended to run a short plan year from July 1, 2009, to December 31, 2009 during which the safe harbor contribution is made. Then, the plan provides the safe harbor 3% qualified nonelective contribution from January 1, 2010, to December 31, 2010. This would satisfy the requirement in the regulation for changing plan years as a safe harbor 401(k) plan, and no testing would be necessary.

• General rules: Provide the notice within a reasonable time before the beginning of the plan year.
  
• The notice is deemed to satisfy the timing requirement if it is provided to each eligible employee not less than 30 days but not more than 90 days before the beginning of each plan year.
  
• Newly eligible participant (defined as becoming eligible after the 90th day before the beginning of the plan year)
• Deemed to satisfy the timing requirement if provided by:
  

• not more than 90 days before the employee becomes eligible, but
• not later than the date the employee becomes eligible.

• A new plan provides timely notice if it follows the same rule as described above for a newly eligible employee. Thus, a new plan can provide the notice as late as the effective date of the plan.

• The notice must be written to be understood by the average employee who is eligible to participate in the plan;
  
• It is sufficiently accurate and comprehensive to inform the employee of the employee’s rights and obligations under the plan; and must describe:

  ·	The safe harbor matching or safe harbor NEC used in the plan, including levels of matching;
  ·	Any other contributions under the plan or matching contributions to another plan based upon deferrals to this plan and the conditions under which such contributions are made;
  ·	The plan to which the safe harbor contribution will be made, if other than the plan with the CODA;
  ·	The type and amount of compensation that may be deferred under the plan;
  ·	How to make deferral elections, including any administrative requirements;
  ·	The periods under the plan for making deferral arrangements;
  ·	Withdrawal and vesting provisions applicable to contributions under the plan; and
  ·	How to obtain additional information about the plan, including an additional SPD, by providing telephone numbers, addresses and if applicable electronic addresses of individuals and/or offices that can provide such information to employees.
  References to SPD. The notice may make cross-reference to the SPD for:
  ·	Any other contributions in the plan;
  ·	The plan that the safe harbor contribution will be made to; or
  ·	Relating to the type or amount of compensation that may be deferred under the plan.

NOTE: In Notice 2005-95, the IRS stated that for plan years that begin before 2007, a safe harbor 401(k) plan will not fail to satisfy the safe harbor notice requirement of the final 401(k) regulations if the notice cross-referenced the plan’s summary plan description (in accordance with the prior guidance in Notice 2000-3 Q&A-8 regarding the vesting and distribution provisions for contributions).

Click here for the IRS Retirement News for Employers Fall 2008 Edition that addresses the operational failure of not providing the safe harbor notice.

1.	QACA Vesting: A QACA may permit 100% vesting to require two years of vesting service.
2.	Escalator provision: A QACA has an automatic enrollment feature with an escalator provision that increases the amount deferred each year. The escalator starts at a level of no less than 3% and then increases by 1% each period (year) until it reaches 6%. Note that the first period starts when the employee is automatically enrolled and lasts until the end of the plan year following the year enrolled. The maximum deferral is 10%.
3.	QACA safe harbor matching contribution formula for a QACA is $/$ on first 1% deferred; then ½$/$ from 1% to 6%. Thus, the maximum match under this formula would be 3.5%.