Author Topic: Any Experts on 401(k) rules and Highly Compensated Employees vs. "Safe Harbor"?  (Read 3056 times)

rantk81

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Hey everybody.  Long time lurker here, first time poster!

I've got some questions regarding 401(k) contribution limits, highly compensated employees, and the safe harbor exception.  I'm assuming most of the folks here are of a similar mind-set as me (e.g. wanting to max out 401(k) contributions), and perhaps someone has encountered my situation.  Hopefully you can help :D

In years past, my employer always matched 100% (dollar for dollar) of the first 3% of my salary that I contributed o the 401(k).  After that, they would match another 50% on the next 3% of my contribution.  To get the maximum match, I would have to contribute at least 6% of my salary, and the company would chip in 4.5% (3% + 1.5%).

This is all well and good, and in recent years, I would always max out my contributions.


However, my employer was acquired a couple years ago by another company.  Following the acquisition, they have been slowly cutting a lot of costs.  Layoffs, cuts to compensation packages, etc.

One of the changes they made for the 2015 calendar year was to change the terms of the 401(k) match program.   Now they match 100% of the first 3%, and then 25% of the next 2%.  The maximum match is now only 3.5%  (3% + 0.5%).

It's a 1% cut to compensation.  Not the worst thing in the world, but oh well.  What concerns me is that from what I've been reading online, this may not be enough to make the company's plan compliant with the "safe harbor" provisions.  Furthermore, since I believe that I would technically be classified as a HCE (Highly Compensated Employee) because my salary exceeds $120,000, I am wondering if there is a nasty surprise lurking for me at the end of this tax year!

Per https://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Definitions
Quote
Highly Compensated Employee - An individual who:
Owned more than 5% of the interest in the business at any time during the year or the preceding year, regardless of how much compensation that person earned or received, or
For the preceding year, received compensation from the business of more than $115,000 (if the preceding year is 2013 or 2014; $120,000 if the preceding year is 2015), and, if the employer so chooses, was in the top 20% of employees when ranked by compensation.


Fidelity is the plan administrator, and the contributions from the employer are still denoted on the site as "Safe Harbor Match".  However, from what I've read, the "new" match from the company does not seem to be compliant with the safe harbor provisions of the 401k tax laws. 

https://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Definitions


From what I've read at: http://www.benefit-resources.com/blog/bid/152520/Guide-to-Safe-Harbor-401-k-Plans

The rules to comply with "safe harbor" are:
Quote
WHAT CONTRIBUTIONS MUST THE COMPANY MAKE TO A SAFE HARBOR 401(k) PLAN?
In a Safe Harbor plan, the employer elects before the beginning of each plan year to make one of two types of contributions for the following year:

A Non-Elective contribution to all eligible participants:
a minimum of 3% of pay
must include pay for the entire plan year regardless of the employee’s entry date in the plan
A matching contribution under one of the formulas listed below (a match is allocated only to employees who defer their own pay to the plan)
Basic Match: 4% of pay for participants who defer at least 5% of their pay.  The Basic Match is structured as follows:
100% of the first 3% of pay that is contributed; and
50% of the next 2% of pay that is contributed
The Enhanced Match:
100% of the first 4% of pay that is contributed to the plan (this is the minimum required under this option)
100% of the first 6% of pay is the maximum allowed to still get a pass on the ACP test


Nobody at the company has made mention of this.  I don't know if they are going to be subject to the IRS rules where they need to ensure a certain contribution level of the lower-paid employees, and if I'll consequently have part of my 401k contribution refunded to me.  I don't even know if anybody at my employer knows about this or has considered it.

Should I inform them about it?  I don't want to seem like a whistle-blower... but I also don't want to get caught in the crossfire if their retirement plans loses it's qualified status with the IRS!

Do you think I'm worrying about nothing?  I really don't know what to do.  Any experts here on the matter?  Or suggestions on what I should do?  Maybe I should just FIRE and roll it over to an IRA before anything happens :lol:

Thanks


DaveR

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I'm not an expert by any means, but as I recall it being explained to me for my company, if the company doesn't meet the safe harbor regs then they are on the hook. It's not like your contributions will be negated or the whole plan will be disallowed by the IRS. The company will have to do more paperwork and might have to put in 3% contributions for everyone, even employees not participating.

Vilgan

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A few things: its either 120k income OR top 20%, typically whichever is least (altho company has to define what they are doing). If you are in a company where lots of people make over 120k and you aren't top 20%.. it doesn't impact you.

Also, if they have a high rate of participation, safe harbor isn't necessary. My previous employer never bothered with safe harbor but automatically enrolled people, and the HCEs were capped at a low % due to very high income so it wasn't a problem.

Finally, might be some funkiness with change of control. I'm not sure how that works with 401k HCE calculations.

rantk81

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I just checked more details of the plan, and for employees hired after Jan 1st 2015, they do not vest in the matching contributions until after 2 years of service with the company.  This is obviously 100% non-safe-harbor compliant.

Also, I do believe I am probably in the top 20% of employee salaries... so I guess I'll just have to wait and see if I will get bitten by this :(

DaveR

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I just checked more details of the plan, and for employees hired after Jan 1st 2015, they do not vest in the matching contributions until after 2 years of service with the company.  This is obviously 100% non-safe-harbor compliant.

Also, I do believe I am probably in the top 20% of employee salaries... so I guess I'll just have to wait and see if I will get bitten by this :(

It sounds like IRS testing will be required. I wouldn't wait and see... talk to HR to get information about the plan's compliance. And if HR is completely unhelpful, you can go bug Fidelity. Fiduciary responsibility and all that.

A bit more info: https://blog.personalcapital.com/retirement-planning/seeking-fairness-401ks-highly-compensated-employees/

OkieStache

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NOT an expert, but I have helped counseled clients on formation issues.  The "Safe Harbor" just gets the company/administrator out of the calculations for the Actual Deferral Percentage (ADP) test, the Actual Contribution Percentage (ACP) test and the Top Heavy minimum contributions.  Not having a Safe Harbor compliant plan doesn't mean that there will necessarily be any adverse consequences for you. 
The only way you really get stung (short of the bankruptcy of the Company) is if your contributions get returned to you and you have to foot the tax bill for that unanticipated "income."  This results from "failing" the non-discrimination tests described above.  Talk to your administrator.  They should be able to give you Q1-Q3 as of today to see if there might be any issues.

rantk81

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Thanks for the info and the link.  I've done some more reading up on it.

It looks like the employer has an opportunity to "correct" it by a few different means (either adding the necessary contributions to employees, or else refunding excess contributions.)

Hopefully they "pass" both tests in the first place though! :)

Reynold

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I ran into this at a previous employer, the first I heard of it was when I was notified that I would have to undo some of my 401k contribution from the previous year.  Since I was notified in late March, and I'd turned in my taxes back in mid February, I had to file an amended return and pay slightly more taxes, since I had more "income".  I didn't have to pay penalties or anything, but having to do a revised federal and state return was annoying.  The same thing happened the following year, but that time I was prepared and didn't file until I found out I'd have to change things.  Accounting seemed unable to generate this information before late March, evidently the company was failing some of the tests described by OkieStache.

rantk81

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A couple days ago I casually mentioned the 401k/HCE/SH stuff to my boss (who is a friend of mine.)

Apparently the other day, he was in a meeting recently with his boss, and they had someone from HR come into talk with them to answer some questions (since annual enrollment is coming up soon.)  My boss said that he mentioned the 401k/safe-harbor issue to the HR rep, and the rep mentioned that the 401k part of the compensation package was his responsibility -- but he wasn't aware of the HCE/SH situation (!!!!!)

Amazing how an afternoon of googling about a topic makes me more of an "expert" on it than someone who's full-time-job is to be on top of these kinds of things...