Additional Employer Matching Contributions in a Safe Harbor Plan
By Cathy Corrado, QKA
Can I Provide an Additional Matching Contribution that Still Qualifies Under the 401(k) Safe Harbor Rules?
An employer can design a plan and avoid worrying about ADP/ACP testing by offering an ADP/ACP safe harbor 401(k) plan. Employers that choose one of the three safe harbor contribution formulas (basic match, enhanced match, or the safe harbor nonelective) agree to make a mandatory contribution to their participants. If a match formula is chosen, only those who elect to make salary deferrals will receive this employer contribution.
Employers that want to provide more than the minimum contribution but still avoid ADP testing can always provide a regular employer match (i.e., a nonsafe harbor match) and/or a profit-sharing contribution, but if they do they will have to pass the ACP test if they make a matching contribution, and will become subject to top-heavy contribution requirements. This will not work for an employer that wants to give a contribution but avoid additional testing and potential top-heavy minimum contributions. In this instance, the employer might want to think about offering a fixed or discretionary ACP safe harbor match.
A discretionary ACP safe harbor match allows the employer to decide each year whether it will make a matching contribution and what the formula will be. A fixed ACP safe harbor match is required to be made each year and the formula needs to be stated in the plan document.
A matching contribution that is made in addition to the ADP safe harbor contribution will not automatically satisfy the ACP safe harbor rules unless it meets the following conditions.
The rate of matching contributions cannot increase as the rate of elective deferral increases.
The matching contribution cannot require an employee’s elective deferrals to exceed six percent of compensation to receive the full match.
Matching contributions made to eligible highly compensated employees (HCEs) must be limited to a rate that doesn’t exceed the rate of matching contributions made to any eligible non-HCE who defers at the same rate.
If the contribution is discretionary, the employer must limit matching contributions to four percent of compensation.
Participants cannot be required to satisfy any other conditions in order to receive the matching contribution.
Because this matching contribution is made in addition to the safe harbor match, it is not a continuation of the ADP match. For instance, if a participant defers 5 percent and receives a 4 percent match under the basic match formula, the additional ACP safe harbor match does not start where the 4 percent match stops. This match is separate from the ADP safe harbor match. The participant is receiving a match on those same dollars deferred under the basic match formula. So the contributions are treated as being made under separate formulas.
It should be noted that while the ADP safe harbor contributions are always 100 percent vested, the employer may attach a vesting schedule to ACP safe harbor contributions.
The employer might also be interested in what has come to be known as a triple stack match. With this approach, the employer is trying to maximize all contributions through a combination of deferrals and employer matching contributions. The first stack is the basic or enhanced safe harbor match. So if a participant defers 5 percent, she will receive a 4 percent matching contribution. The second stack consists of the ACP safe harbor discretionary matching contribution: the employer could make a matching contribution on 6 percent of deferrals, the total not to exceed 4 percent of compensation. The third stack would consist of a fixed ACP safe harbor match that cannot be based on deferrals that exceed 6 percent of compensation. Because these are all safe harbor contributions, the employer would not need to do ADP/ACP testing.
While this approach may not work for all employers, it could allow some to make additional safe harbor matching contributions. Employers who are thinking about implementing this provision should discuss the plan with their plan provider, legal counsel, or tax professional in order to decide what is best for their plan.
