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

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  • Hi Adam
    Interesting presentation. Would you be able to share a copy with me ? thanks

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

  1. 1. IRS/ASPPA Mid-Atlantic Benefits Conference<br />Safe-Harbor 401(k) Plans:<br />Where Are They Now?<br />Presented By<br />Adam C. Pozek, QPA, QPFC, ERPA<br />DWC ERISA Consultants, LLC<br />Workshop #4<br />Monday, May 24, 2010<br />
  2. 2. What We’ll Cover<br />
  3. 3. Agenda<br />Overview of safe harbor 401(k) plans<br />Types of safe harbor 401(k) plans<br />Notice requirements<br />Implementation and discontinuance issues<br />Plan designs and case studies<br />3<br />
  4. 4. Overview of<br />Safe Harbor<br />401(k) Plans<br />
  5. 5. Safe Harbor 401(k) Plans<br />Provides deemed passage of ADP test<br />Several design options available<br />“Traditional”<br />Qualified automatic contribution arrangement (“QACA”)<br />DB(k)<br />Minimum required employer contribution<br />Match<br />Nonelective<br />DB accrual<br />Accelerated vesting required<br />Annual notice required<br />5<br />
  6. 6. Safe Harbor 401(k) Plans<br />Provides deemed passage of ACP test if…<br />No matching contribution is based on deferrals exceeding 6% of compensation, and<br />Additional discretionary match does not exceed 4% of compensation<br />Provides deemed satisfaction of top heavy requirements if…<br />Only contributions to the plan are deferrals and safe-harbor contributions<br />6<br />
  7. 7. Safe Harbor 401(k) Plans<br />Split eligibility is permitted<br />Immediate for deferrals/Age 21 and 1 YOS for safe-harbor<br />May require testing for short-service group<br />May require top-heavy minimum for short-service group<br />Employee exclusions are permitted<br />All plan components must satisfy coverage<br />Alternative comp definitions are permitted<br />Must be nondiscriminatory under §414(s)<br />Allocation conditions not permitted<br />7<br />
  8. 8. Types of<br />Safe Harbor<br />401(k) Plans<br />
  9. 9. Traditional Safe Harbor<br />Initially effective for plan years beginning in 1999<br />Created by SBJPA<br />IRC §401(k)(12)<br />Treas. Reg. §§ 1.401(k)-3 and 1.401(m)-3<br />Two employer contribution options<br />Matching contribution<br />Nonelective contribution<br />9<br />
  10. 10. Safe Harbor Matching Contribution<br />Matching formula must be at least as generous as…<br />100% of the first 3% of comp deferred, plus<br />50% of the next 2% deferred<br />Cannot be based on elective deferrals that exceed 6% of compensation<br />Full and immediate vesting required<br />10<br />
  11. 11. Safe Harbor Matching Contribution<br /><ul><li>Deposit deadline depends on basis of calculation
  12. 12. Plan year
  13. 13. The last day of the following plan year
  14. 14. Pay period
  15. 15. The last day of the subsequent quarter
  16. 16. See Treas. Reg. §1.401(k)-3(c)(5)(ii)</li></ul>11<br />
  17. 17. Safe Harbor Nonelective Contribution<br />Minimum contribution equal to 3% of plan compensation<br />Double-duty in new comparability plans<br />Full and immediate vesting required<br />Deposit deadline is last day of the following plan year<br />12<br />
  18. 18. Safe Harbor…Maybe<br />Optional provision for plans using the nonelective safe harbor<br />Plan document specifies the employer might elect to be safe harbor<br />Employer notifies participants prior to the start of the year that it might make a safe harbor contribution<br />Employer provides supplemental notice prior to the end of the year to confirm whether or not it will make the contribution<br />13<br />
  19. 19. Qualified Automatic Contribution Arrangement<br />Initially effective for plan years beginning in 2008<br />Created by PPA<br />IRC §401(k)(13)<br />Treas. Reg. §§ 1.401(k)-3 and 1.401(m)-3<br />Auto enrollment and auto escalation<br />Two employer contribution options<br />Matching contribution<br />Nonelective contribution<br />14<br />
  20. 20. QACA Employer Contributions<br />Matching formula must be at least as generous as…<br />100% of the first 1% of comp deferraled, plus<br />50% of the next 5% deferred<br />Cannot be based on deferrals exceeding 6% of compensation<br />Nonelective contribution of at least…<br />3% of plan compensation<br />Double-duty in new comparability plans<br />2-year cliff vesting required<br />15<br />
  21. 21. QACA Deferrals<br />Minimum default rates<br />Initial period = 3%<br />Year 2 = 4%<br />Year 3 = 5%<br />Year 4 = 6%<br />Maximum default rate is 10%<br />Initial period runs from auto enrollment date through end of the following plan year<br />Uniformity rule applies<br />16<br />
  22. 22. Timing of Escalation<br />End of plan year is permitted<br />Middle of plan year permitted if…<br />Timing is uniform, and<br />Minimum defaults are always met<br />See IRS Revenue Ruling 2009-30<br />17<br />
  23. 23. Timing of Escalation – Example 1<br /><ul><li>Big Kahuna 401(k) Plan includes QACA
  24. 24. Escalations concurrent with raises each July 1st after Initial Period
  25. 25. Jules is first covered by QACA on April 1, 2010
  26. 26. Initial Period runs through December 31, 2011</li></ul>18<br />
  27. 27. Timing of Escalation – Example 2<br /><ul><li>Big Kahuna 401(k) Plan includes QACA
  28. 28. Escalations concurrent with raises each July 1st
  29. 29. Jules is first covered by QACA on April 1, 2010
  30. 30. Initial Period runs through December 31, 2011</li></ul>19<br />
  31. 31. Escalation for Rehires<br />Default percentage tied to date of most recent default deferrals<br />Can reset Initial Period if no default deferrals during the plan year immediately preceding rehire<br />Permitted but not mandatory<br />Must be specified in plan document<br />Employment termination ignored if rehired in a shorter timeframe<br />20<br />
  32. 32. Escalation for Rehires - Example<br />Diamond Wholesalers, LLC 401(k) Plan<br />Mr. Orange<br />Initial eligibility date is March 31, 2010<br />Termination date is January 31, 2011<br />Rehire date is December 1, 2012<br />Mr. Pink<br />Initial eligibility date is January 1, 2010<br />Termination date is December 31, 2010<br />Rehire date is January 2, 2012<br />21<br />
  33. 33. Escalation for Rehires - Example<br />22<br />
  34. 34. DB(k)<br />Initially effective for plan years beginning in 2010<br />Created by PPA<br />IRC §414(x)<br />A/k/a eligible combined plan<br />No regulations, but see IRS Notice 2009-71<br />Available for companies with…<br />2 to 500 employees<br />On each day of previous plan year<br />23<br />23<br />
  35. 35. DB(k)<br />Contributions include…<br />Automatic contribution arrangement<br />DC safe-harbor contribution, and<br />DB accrual<br />24<br />24<br />
  36. 36. Defined Benefit Component<br />Benefit formula may be…<br />Final pay of at least 1% x YOS up to 20 years, or <br />Cash balance allocation based on age (2% to 8%)<br />Age 30 or younger = 2%<br />Over age 30 but less than 40 = 4%<br />Over age 40 but less than 50 = 6%<br />Over age 50 = 8%<br />Maximum 3-year cliff vesting schedule<br />25<br />25<br />
  37. 37. Defined Contribution Component<br />Mandatory automatic enrollment at 4%<br />Mandatory matching contribution<br />At least 50% of the first 4% of comp deferred<br />Subject to immediate vesting<br />Additional match and/or nonelective permitted<br />Permitted disparity and new comparability NOT permitted<br />Maximum 3-year cliff vesting<br />26<br />26<br />
  38. 38. Notice<br />Requirements<br />
  39. 39. Safe Harbor Notice<br />Must be provided within a reasonable time prior to the start of the year<br />Generally 30 to 90 days<br />Must describe…<br />Match or nonelective contribution formula<br />Additional contributions available in the plan<br />Type and amount of comp that can be deferred<br />Procedure for making deferral elections<br />Withdrawal and vesting provisions<br />Contact to obtain additional information<br />28<br />
  40. 40. QACA Notice<br />Subject to same timing requirement<br />Immediate entry plans<br />Date of hire<br />Prior to pay date for pay period that includes employees eligibility date<br />Must allow sufficient time for participant to act<br />29<br />
  41. 41. QACA Notice<br />Must describe…<br />Default rate absent an affirmative election<br />Right to defer a different amount<br />Default investment<br />May be combined with safe harbor notice<br />30<br />
  42. 42. Implementation<br />And Discontinuance<br />Issues<br />
  43. 43. Implementation<br />Startups and non-401(k) plans<br />Can be added mid-year<br />Initial year must include safe harbor for at least 3 months<br />Implementation no later than October 1st for a calendar year plan<br />Amendment must be signed prior to implementation<br />32<br />
  44. 44. Implementation<br />Existing 401(k) plans<br />Must be added at the start of a plan year<br />Amendment must be signed prior to the start of the plan year<br />33<br />
  45. 45. Elimination of Safe Harbor Match<br />Amend plan to discontinue on a prospective basis<br />Provide notice to employees 30 days prior to discontinuance<br />Fund match through date of discontinuance<br />Run ADP/ACP tests for the entire year<br />34<br />
  46. 46. Elimination of Safe Harbor Nonelective<br />New regulations proposed May 18, 2009<br />Same steps as for safe harbor match<br />Must pro-rate compensation limit<br />Only permitted due to business hardship<br />35<br />
  47. 47. Keep In Mind<br />ADP/ACP tests apply for the entire year<br />Top-heavy minimum contribution may be required<br />Safe harbor cannot be added back until the start of a subsequent year<br />36<br />
  48. 48. Plan Design<br />And<br />Case Studies<br />
  49. 49. Case Study #1<br />I Love Rock N Roll, Inc.<br />Plan consistently fails test<br />HCE ADP = 10%<br />NHCE ADP = 4%<br />Is Safe Harbor 401(k) the best option?<br />38<br />
  50. 50. 39<br />I Love Rock N Roll, Inc. – NHCE Group<br />
  51. 51. 40<br />I Love Rock N Roll, Inc. – SH Nonelective<br />
  52. 52. 41<br />I Love Rock N Roll, Inc. – SH Match<br />
  53. 53. 42<br />I Love Rock N Roll, Inc. – Targeted QNEC #1<br />
  54. 54. 43<br />I Love Rock N Roll, Inc. – Targeted QNEC #2<br />
  55. 55. Case Study #1<br />I Love Rock N Roll, Inc.<br />HCE ADP = 10%<br />NHCE ADP = 4%<br />Options<br />Pro rata QNEC = $595,000 x 4% = $23,800<br />Safe Harbor NEC = $17,850<br />Safe Harbor Match = $14,650<br />Targeted QNEC #1 = $15,068<br />Targeted QNEC #2 = $13,800<br />44<br />
  56. 56. Case Study #2<br />SmallCo, Inc.<br />One key employee/HCE<br />Five non-keys/NHCEs<br />Maintains safe harbor match plan<br />BigCo, Inc.<br />Several hundred employees<br />No plan<br />45<br />
  57. 57. Case Study #2<br />Here’s what happened…<br />BigCo acquired SmallCo mid-2007<br />SmallCo plan is amended Nov 2007<br />Adds BigCo as participating employer as of Jan 1, 2008<br />Removes safe harbor effective Jan 1, 2008<br />SmallCo submits 2006 census in Dec 2007<br />SH for 2006 so no ADP/ACP issues<br />Key employee balance < 60% at 12/31/06 so not top heavy for 2007<br />Non-key employee with large account balance terminated employment in 2006<br />46<br />
  58. 58. Case Study #2<br />Here’s what happened…<br />SmallCo submits 2007 census in June 2008<br />SH for 2007 so no ADP/ACP issues<br />Key employee balance > 60% at 12/31/07 so plan is top heavy for 2008<br />As of January 1, 2008<br />Safe harbor is eliminated<br />BigCo employees now eligible<br />Plan is top heavy requiring 3% nonelective to all non-key employees to the tune of $200,000<br />47<br />
  59. 59. New Comparability Design<br />Minimum NHCE “gateway” contribution equal to the lesser of<br />5% of compensation<br />1/3 the highest percentage allocated to any HCE<br />48<br />
  60. 60. New Comparability Design – Profit Sharing Only<br />49<br />
  61. 61. New Comparability Design – PS + SH401(k)<br />50<br />
  62. 62. Safe Harbor Match x 3<br />51<br />

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