| 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 also satisfies the ADP safe harbor contribution requirement.
In what tests does the plan use safe harbor matching contributions (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 ADP 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 average benefit percentage test?
No. Catch-up contributions are not includible in the test.
We will discuss this and other plan designs in the live seminar Cross-Tested/Safe Harbor 401(k) Plan Design and Troubleshooting Workshop scheduled in August through October. See details below.
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Upcoming Web Seminars:
Participant Disclosures after FAB 2012-2: A Game Changer, July 17, 1:00 p.m. ET (early start time)
Death and the 401(k) Plan, July 19, 12:00 p.m. ET (early start time)
457(b) Plans for 401(k) Practitioners 2012, July 24, 2:00 p.m. ET
Brokerage Accounts and 404a-5: Making Sense of the Rules, August 9, 2:00 p.m. ET
403(b) Plans for 401(k) Practitioners – 3 parts, August 14-15-16, 2:00 p.m. ET each day
And watch for these Web seminar topics coming in August:
Filing streamlined applications under VCP – step-by-step explanation
Troubleshooting participant loans
Visit our Web site at www.relius.net/Events/events.aspx?Web for more details and to register online.
Fundamentals of 401(k) and Other Qualified Plans – 2 Cities Left
Visit our Web site at www.relius.net/Events/events.aspx?Seminar now for detailed information, dates/locations, and to register online.
Cross-Tested/Safe Harbor 401(k) Plan Design Workshop – August-October, Registration Open
See complete agenda and register online here: www.relius.net/Events/events.aspx?Seminar
Chicago Advanced Pension Conference – September 5-7, Earn up to 19 hrs of CE credits
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Just for ERPAs Workshop, Chicago IL – September 4, Earn up to 8 hrs of ERPA credits, including 2 ethics hrs
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