Pacific Retirement

ELIMINATES 401(k) & MATCH NON-DISCRIMINATION TESTING!

Both the 401(k) and matching non-discrimination testing can be passed automatically. The employer must make a specific type of Profit Sharing (PS) or Matching contribution. These contributions can also be used for other qualification requirements, such as cross-testing, and top heavy minimum!

In general, a plan may dispense with 401(k) and matching testing by providing either:

a PS contribution equal to 3% of compensation for all eligible non-highly compensated employees (NHCE), or
a Matching contribution equal to 100% of 401(k) deferrals up to 3% of compensation, plus 50% of 401(k) deferrals between 3% to 5% of compensation for NHCE. This effectively results in a 4% pay-matching rate for employees who defer 5% or more of their pay.

These contributions must be fully vested and subject to the same distribution restrictions as 401(k) salary deferrals. These contribution cannot require any hourly or year-end employment requirement. The 3% of pay PS contribution would be the better choice if employer wants to automatically provide top heavy minimum through the safe-harbor plan.

The plan can also provide a matching contribution for highly compensated employees (HCE) at the same or lower rate than that prescribed for the NHCE. This will not adversely affect the 401(k) safe harbor. However, if the plan wants to also avoid ACP testing, only deferrals up to 6% of pay can be matched and the total matching amount cannot exceed 4% of pay.

Examples:

A law firm has 4 partners and 8 other employees. The 4 partners are the only HCE. The 4 partners wish to defer the $15,500 maximum, which represents 6.67% of pay. However, only 2 of the 8 NHCE make salary deferrals and the ADP for the NHCE group is only 1.25%.

For 2008, the partnership adopts the 401(k) safe-harbor matching contribution. If each of the 2 NHCE making salary deferrals has pay of $50,000 and defers 5% of pay, then the total cost to the partnership is the matching contribution of 4% of pay or $4,000. Making this matching contribution allows the partners to increase their deferrals from $5,750 to $15,500 each.

Take the same situation as above, except the partnership has a cross-tested profit sharing allocation, which provides a 13.26% rate of contribution for partners and a total of 5% to the employees. The same 3% allocation that is used to eliminate the ADP requirement can also be used to pass the cross-tested non-discrimination testing. Each partner receives total profit sharing and salary deferral contributions of $46,000 (13.26% of $230,000 plus $15,500 deferral).

The plan must notify participants their rights and obligations under the plan 30 to 90 days prior to the start of the plan year before eliminating non-discrimination testing. This notice should identify whether the match or non-elective contribution will be made. Most plans will require amendments before the beginning of the plan year to which the safe-harbor is intended to apply.