Five Plan Design Considerations

1. If your plan is top heavy (most likely requires a 3% contribution to non key participants if the key employees are benefitting from the plan), you should adopt the Safe Harbor NEC plan design (3% contribution to all eligible participants). This design allows the owners and HCE’s to maximize their salary deferrals without worrying about the ADP/ACP and top heavy tests.

2. If your plan allows loans, limit the loans to one outstanding with no refinancing. This is easy for the plan sponsor to administer and eliminates the revolving door questions related to loans and hardship withdrawals.

3. If you have a company match provision, make sure you take the time to make the calculation/funding question seriously. Your options can include by payroll, quarterly, or at year-end. If you select any frequency other than year-end, the company match contributions are due by the end of the following quarter! Please be aware of the year-end true-up provision as well (especailly those plans with a match by payroll that have owners making inconsistent salary deferrals or depositing the entire contribution in one event).

4. Understand the definition of compensation. (See Plan Document)

5. In the first year of the plan make sure you understand the period of compensation used for the profit sharing calculation (full year versus from the date the plan implemented). In addition on an ongoing basis, you have the option to use compensation for the entire plan year versus from the time the participant became eligible. This is important for budgeting purposes.

Important Plan Design News – Safe Harbor NEC Plans

On May 18, 2009 the IRS issued new guidance offering relief to plans with safe harbor non elective contributions NEC, which is a 3% contribution to all eligible participants. Before May 18th, the IRS treated the safe harbor NEC as an accrued benefit. As such, once the Safe Harbor Notice was issued 30 days before the start of the plan year, the company was required to make the 3% contribution (short of qualifying for a plan termination based on certain financial hardship criteria). Under the proposed regulations (which are in force now), a plan sponsor suffering a substantial business hardship can suspend the safe harbor NEC with a 30 day plan notice to all eligible participants. Please note, if the plan is top heavy, the company will be required to make the required top heavy contribution (most likely 3% anyway). The plan will also be subject to ADP/ACP testing as well. Please work with your ERISA consultant before amending your plan!


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