Combining a "safe harbor" sec. 401(k) plan with a new comparability defined contribution plan.

• Author: Packard, Pamela

In general, Sec. 401(k) plans with both participant "elective deferrals" (as defined in Sec. 402(g)) and employer matching contributions (under Sec. 401(m)), must prove annually that these deferrals and contributions do not discriminate against nonhighly compensated employees (NHCEs) in favor of highly compensated employees (HCEs). Performing the actual deferral percentage (ADP) test under Sec. 401(k)(3) and the actual contribution percentage (ACP) test under Sec. 401(m)(2) accomplishes this. Both sections provide the same two arithmetic algorithms to calculate whether participant elective deferrals or employer matching contributions are discriminatory.

Unfortunately, the calculations are time consuming; further, negative results need to be repaired as quickly as possible to avoid excise taxes and undesirable individual income tax and retirement planning results. To avoid the excise tax, the excesses must be cured by March 15 of the year following the year of failure for a calendar-year plan, under Sec. 4979(f).

The Safe-Harbor Sec. 401(k) Plan

Sec. 401(k)(12) describes a "safe harbor Sec. 401(k) plan." It provides for a mandatory, fully vested employer nonelective contribution or matching contribution that will result in the plan automatically passing the ADP and ACP tests.

There are two statutory requirements for a Sec. 401(k) plan to meet the safe-harbor standards:

1. A contribution requirement under Sec. 401(k)(12)(A)(i); and

2. A notice requirement under Sec. 401(k)(12)(a)(ii) .

   Sec. 401(k)(12)(C) and (B) mandate that a safe-harbor Sec. 401(k) plan sponsor generally make one of two types of contributions, at least for NHCEs:

1. A 3% of compensation, fully vested nonelective contribution, to all eligible plan participants (the 3% QNEC); or

2. A fully vested matching contribution (the QMAC) equal to the sum of:

   1. 100% of the first 3% of compensation deferred; plus

   2. 50% of the next 2% of compensation.

   Although a 3% QNEC to all NHCEs will satisfy the Sec. 401(k) safe-harbor contribution requirement, the plan may still not satisfy the top-heavy minimum contribution requirement to the extent there are nonkey HCEs who do not receive the 3% QNEC.

   Under the Sec. 401(k)(12)(D) notice requirement, the plan sponsor must notify eligible participants in writing of their plan rights and obligations, at least 30 days before the beginning of a new plan year.

   The New Comparability Plan

   A new comparability defined contribution plan establishes that...