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Safe Harbor 401(k) Plans: Where Are They Now?
 

Safe Harbor 401(k) Plans: Where Are They Now?

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    Safe Harbor 401(k) Plans: Where Are They Now? Safe Harbor 401(k) Plans: Where Are They Now? Presentation Transcript

    • IRS/ASPPA Mid-Atlantic Benefits Conference
      Safe-Harbor 401(k) Plans:
      Where Are They Now?
      Presented By
      Adam C. Pozek, QPA, QPFC, ERPA
      DWC ERISA Consultants, LLC
      Workshop #4
      Monday, May 24, 2010
    • What We’ll Cover
    • Agenda
      Overview of safe harbor 401(k) plans
      Types of safe harbor 401(k) plans
      Notice requirements
      Implementation and discontinuance issues
      Plan designs and case studies
      3
    • Overview of
      Safe Harbor
      401(k) Plans
    • Safe Harbor 401(k) Plans
      Provides deemed passage of ADP test
      Several design options available
      “Traditional”
      Qualified automatic contribution arrangement (“QACA”)
      DB(k)
      Minimum required employer contribution
      Match
      Nonelective
      DB accrual
      Accelerated vesting required
      Annual notice required
      5
    • Safe Harbor 401(k) Plans
      Provides deemed passage of ACP test if…
      No matching contribution is based on deferrals exceeding 6% of compensation, and
      Additional discretionary match does not exceed 4% of compensation
      Provides deemed satisfaction of top heavy requirements if…
      Only contributions to the plan are deferrals and safe-harbor contributions
      6
    • Safe Harbor 401(k) Plans
      Split eligibility is permitted
      Immediate for deferrals/Age 21 and 1 YOS for safe-harbor
      May require testing for short-service group
      May require top-heavy minimum for short-service group
      Employee exclusions are permitted
      All plan components must satisfy coverage
      Alternative comp definitions are permitted
      Must be nondiscriminatory under §414(s)
      Allocation conditions not permitted
      7
    • Types of
      Safe Harbor
      401(k) Plans
    • Traditional Safe Harbor
      Initially effective for plan years beginning in 1999
      Created by SBJPA
      IRC §401(k)(12)
      Treas. Reg. §§ 1.401(k)-3 and 1.401(m)-3
      Two employer contribution options
      Matching contribution
      Nonelective contribution
      9
    • Safe Harbor Matching Contribution
      Matching formula must be at least as generous as…
      100% of the first 3% of comp deferred, plus
      50% of the next 2% deferred
      Cannot be based on elective deferrals that exceed 6% of compensation
      Full and immediate vesting required
      10
    • Safe Harbor Matching Contribution
      • Deposit deadline depends on basis of calculation
      • Plan year
      • The last day of the following plan year
      • Pay period
      • The last day of the subsequent quarter
      • See Treas. Reg. §1.401(k)-3(c)(5)(ii)
      11
    • Safe Harbor Nonelective Contribution
      Minimum contribution equal to 3% of plan compensation
      Double-duty in new comparability plans
      Full and immediate vesting required
      Deposit deadline is last day of the following plan year
      12
    • Safe Harbor…Maybe
      Optional provision for plans using the nonelective safe harbor
      Plan document specifies the employer might elect to be safe harbor
      Employer notifies participants prior to the start of the year that it might make a safe harbor contribution
      Employer provides supplemental notice prior to the end of the year to confirm whether or not it will make the contribution
      13
    • Qualified Automatic Contribution Arrangement
      Initially effective for plan years beginning in 2008
      Created by PPA
      IRC §401(k)(13)
      Treas. Reg. §§ 1.401(k)-3 and 1.401(m)-3
      Auto enrollment and auto escalation
      Two employer contribution options
      Matching contribution
      Nonelective contribution
      14
    • QACA Employer Contributions
      Matching formula must be at least as generous as…
      100% of the first 1% of comp deferraled, plus
      50% of the next 5% deferred
      Cannot be based on deferrals exceeding 6% of compensation
      Nonelective contribution of at least…
      3% of plan compensation
      Double-duty in new comparability plans
      2-year cliff vesting required
      15
    • QACA Deferrals
      Minimum default rates
      Initial period = 3%
      Year 2 = 4%
      Year 3 = 5%
      Year 4 = 6%
      Maximum default rate is 10%
      Initial period runs from auto enrollment date through end of the following plan year
      Uniformity rule applies
      16
    • Timing of Escalation
      End of plan year is permitted
      Middle of plan year permitted if…
      Timing is uniform, and
      Minimum defaults are always met
      See IRS Revenue Ruling 2009-30
      17
    • Timing of Escalation – Example 1
      • Big Kahuna 401(k) Plan includes QACA
      • Escalations concurrent with raises each July 1st after Initial Period
      • Jules is first covered by QACA on April 1, 2010
      • Initial Period runs through December 31, 2011
      18
    • Timing of Escalation – Example 2
      • Big Kahuna 401(k) Plan includes QACA
      • Escalations concurrent with raises each July 1st
      • Jules is first covered by QACA on April 1, 2010
      • Initial Period runs through December 31, 2011
      19
    • Escalation for Rehires
      Default percentage tied to date of most recent default deferrals
      Can reset Initial Period if no default deferrals during the plan year immediately preceding rehire
      Permitted but not mandatory
      Must be specified in plan document
      Employment termination ignored if rehired in a shorter timeframe
      20
    • Escalation for Rehires - Example
      Diamond Wholesalers, LLC 401(k) Plan
      Mr. Orange
      Initial eligibility date is March 31, 2010
      Termination date is January 31, 2011
      Rehire date is December 1, 2012
      Mr. Pink
      Initial eligibility date is January 1, 2010
      Termination date is December 31, 2010
      Rehire date is January 2, 2012
      21
    • Escalation for Rehires - Example
      22
    • DB(k)
      Initially effective for plan years beginning in 2010
      Created by PPA
      IRC §414(x)
      A/k/a eligible combined plan
      No regulations, but see IRS Notice 2009-71
      Available for companies with…
      2 to 500 employees
      On each day of previous plan year
      23
      23
    • DB(k)
      Contributions include…
      Automatic contribution arrangement
      DC safe-harbor contribution, and
      DB accrual
      24
      24
    • Defined Benefit Component
      Benefit formula may be…
      Final pay of at least 1% x YOS up to 20 years, or
      Cash balance allocation based on age (2% to 8%)
      Age 30 or younger = 2%
      Over age 30 but less than 40 = 4%
      Over age 40 but less than 50 = 6%
      Over age 50 = 8%
      Maximum 3-year cliff vesting schedule
      25
      25
    • Defined Contribution Component
      Mandatory automatic enrollment at 4%
      Mandatory matching contribution
      At least 50% of the first 4% of comp deferred
      Subject to immediate vesting
      Additional match and/or nonelective permitted
      Permitted disparity and new comparability NOT permitted
      Maximum 3-year cliff vesting
      26
      26
    • Notice
      Requirements
    • Safe Harbor Notice
      Must be provided within a reasonable time prior to the start of the year
      Generally 30 to 90 days
      Must describe…
      Match or nonelective contribution formula
      Additional contributions available in the plan
      Type and amount of comp that can be deferred
      Procedure for making deferral elections
      Withdrawal and vesting provisions
      Contact to obtain additional information
      28
    • QACA Notice
      Subject to same timing requirement
      Immediate entry plans
      Date of hire
      Prior to pay date for pay period that includes employees eligibility date
      Must allow sufficient time for participant to act
      29
    • QACA Notice
      Must describe…
      Default rate absent an affirmative election
      Right to defer a different amount
      Default investment
      May be combined with safe harbor notice
      30
    • Implementation
      And Discontinuance
      Issues
    • Implementation
      Startups and non-401(k) plans
      Can be added mid-year
      Initial year must include safe harbor for at least 3 months
      Implementation no later than October 1st for a calendar year plan
      Amendment must be signed prior to implementation
      32
    • Implementation
      Existing 401(k) plans
      Must be added at the start of a plan year
      Amendment must be signed prior to the start of the plan year
      33
    • Elimination of Safe Harbor Match
      Amend plan to discontinue on a prospective basis
      Provide notice to employees 30 days prior to discontinuance
      Fund match through date of discontinuance
      Run ADP/ACP tests for the entire year
      34
    • Elimination of Safe Harbor Nonelective
      New regulations proposed May 18, 2009
      Same steps as for safe harbor match
      Must pro-rate compensation limit
      Only permitted due to business hardship
      35
    • Keep In Mind
      ADP/ACP tests apply for the entire year
      Top-heavy minimum contribution may be required
      Safe harbor cannot be added back until the start of a subsequent year
      36
    • Plan Design
      And
      Case Studies
    • Case Study #1
      I Love Rock N Roll, Inc.
      Plan consistently fails test
      HCE ADP = 10%
      NHCE ADP = 4%
      Is Safe Harbor 401(k) the best option?
      38
    • 39
      I Love Rock N Roll, Inc. – NHCE Group
    • 40
      I Love Rock N Roll, Inc. – SH Nonelective
    • 41
      I Love Rock N Roll, Inc. – SH Match
    • 42
      I Love Rock N Roll, Inc. – Targeted QNEC #1
    • 43
      I Love Rock N Roll, Inc. – Targeted QNEC #2
    • Case Study #1
      I Love Rock N Roll, Inc.
      HCE ADP = 10%
      NHCE ADP = 4%
      Options
      Pro rata QNEC = $595,000 x 4% = $23,800
      Safe Harbor NEC = $17,850
      Safe Harbor Match = $14,650
      Targeted QNEC #1 = $15,068
      Targeted QNEC #2 = $13,800
      44
    • Case Study #2
      SmallCo, Inc.
      One key employee/HCE
      Five non-keys/NHCEs
      Maintains safe harbor match plan
      BigCo, Inc.
      Several hundred employees
      No plan
      45
    • Case Study #2
      Here’s what happened…
      BigCo acquired SmallCo mid-2007
      SmallCo plan is amended Nov 2007
      Adds BigCo as participating employer as of Jan 1, 2008
      Removes safe harbor effective Jan 1, 2008
      SmallCo submits 2006 census in Dec 2007
      SH for 2006 so no ADP/ACP issues
      Key employee balance < 60% at 12/31/06 so not top heavy for 2007
      Non-key employee with large account balance terminated employment in 2006
      46
    • Case Study #2
      Here’s what happened…
      SmallCo submits 2007 census in June 2008
      SH for 2007 so no ADP/ACP issues
      Key employee balance > 60% at 12/31/07 so plan is top heavy for 2008
      As of January 1, 2008
      Safe harbor is eliminated
      BigCo employees now eligible
      Plan is top heavy requiring 3% nonelective to all non-key employees to the tune of $200,000
      47
    • New Comparability Design
      Minimum NHCE “gateway” contribution equal to the lesser of
      5% of compensation
      1/3 the highest percentage allocated to any HCE
      48
    • New Comparability Design – Profit Sharing Only
      49
    • New Comparability Design – PS + SH401(k)
      50
    • Safe Harbor Match x 3
      51