| A safe harbor 401(k) cross-tested plan combines two of the most attractive defined contribution plan designs. The plan design provides (1) enhanced disparity; (2) flexibility; and (3) catch-up contribution potential. Understanding how the safe harbor and cross tested rules interact is essential in designing the combined plan. In this Technical Update, we discuss some of the important issues which affect the plan design.
In applying “rate group" testing to the allocations (converted to equivalent benefit rates (EBRs)), what safe harbor contributions may the plan include in the test?
The plan may include nonelective contributions, including safe harbor nonelective contributions (e.g., 3% nonelective contribution). If a plan uses forfeitures to offset the safe harbor nonelective contributions, the plan also would include the forfeitures in the rate group testing. Neither safe harbor matching contributions nor other matching contributions would be included in rate group testing. However, if the plan uses the average benefits test as part of the general nondiscrimination test, the plan would include the matching contributions (safe harbor and other) and elective deferrals in performing the average benefit percentage test.
In addition to rate group testing, in what other tests does the plan use the safe harbor nonelective contributions?
The plan also may use the safe harbor nonelective contribution to satisfy the: (1) minimum gateway requirement; (2) top heavy minimum; and (3) average benefit percentage test (if necessary). Of course, the safe harbor nonelective contribution satisfies the ADP safe harbor contribution requirement.
In what tests does the plan use safe harbor matching contribution (including other matching contributions that satisfy the ACP safe harbor requirements)?
The plan uses safe harbor matching contributions to satisfy the: (1) top heavy minimum contribution requirement; and (2) the average benefit percentage test (if the plan uses the average benefits test to satisfy the general nondiscrimination test). Of course, the basic match or enhanced match satisfies the ACP safe harbor contribution requirement. Matching contributions do not count towards the minimum gateway.
If an employer combined a traditional 401(k) plan with a cross-tested plan and the employer made a qualified nonelective contribution (QNEC) to satisfy the ADP test, would the plan include the QNEC in rate group testing? To satisfy the minimum gateway?
The answer to each question is effectively “no." With respect to QNECs, the regulations provide that the plan must be able to satisfy the Code §401(a)(4) nondiscrimination requirements with and without the QNECs. Therefore, the plan must effectively pass the rate group testing and the minimum gateway requirements without the benefit of the QNECs. In the unusual situation in which an NHCE receives a QNEC used in the ADP test, and no other contribution, the NHCE is benefiting and therefore must receive the full minimum gateway. Note: This conclusion seems inconsistent when comparing the outcome with safe harbor nonelective contributions because the contributions are similar. Nevertheless, the regulations are clear in their application.
If a plan is using the average benefits test to demonstrate that the plan is nondiscriminatory under the general nondiscrimination test, must the plan use catch-up contributions in the test?
No. Catch-up contributions are not includible in the test.
These plan design issues will be covered in detail at our Cross-Tested/Safe Harbor 401(k) Plan Design Workshop.
Cross-Tested/Safe Harbor 401(k) Plan Design Workshop – 12 cities, August – September
Crossed-tested plans and Safe Harbor 401(k) plans are two of the most dynamic plan designs in use today. In this full-day workshop, we’ll give you analysis and strategies to help you and your clients make full use of the design alternatives. We’ll review the basics, address problem issues, and show you how cross-testing and safe harbor designs can work together in a flexible environment to achieve employer goals and reduce costs. More than just a review of the rules, this program will help you understand the planning possibilities that exist, so you can choose the right tools for your clients.
403(b) Plan Design Workshop – 7 cities, August – September
Designing 403(b) plans can be a minefield for an unwary practitioner. They look similar to 401(k) plans, until one of the many differences comes to haunt you. Universal availability, limited investments, and special rules for church plans are just some of the challenges practitioners face, especially those for whom 403(b) plans are “just a sideline." Plan to join us and learn strategies and approaches a practitioner can use to navigate the minefield, and leave the employer with a retirement arrangement which best satisfies its goals and the needs of its employees.
For more information or to register, click here.
Advanced Pension Conference – Chicago, August 30 – September 1, 2010
The significant changes to the Schedule C foreshadow the new fee disclosure regulations that the DOL will issue this summer. The new regulations will impact most retirement plans and will require revisions to service provider agreements with the plan. The Chicago Advanced Pension Conference will provide practical insight into the new regulations. The conference will also address other topics such as Designing fee agreements, Schedule C case studies, Troubleshooting EFAST2, Hot Topics in Plan Corrections, and Cash Balance Plans for DC Practitioners. Click here for more information.
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