Employer safe harbor 401k Non elective vs match

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clivus
Posts: 9
Joined: Mon Jun 29, 2009 9:56 pm

Employer safe harbor 401k Non elective vs match

Post by clivus » Sat Jun 10, 2017 12:21 pm

I'm in the process of setting up a Vanguard 401k for my small business. Right now it's being set up as a non-elective 4% to pass Safe Harbor testing. I can't remember why we did 4% non elective instead of the minimum 3%. Also, is there a benefit to doing the non-elective contribution over the 4% basic match or enhanced match?
I have a doctor's office with one nurse practitioner that I make about twice the salary of. The rest of my employees, including my wife, are hourly.

ERISA Stone
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Joined: Tue Jun 24, 2014 8:54 am

Re: Employer safe harbor 401k Non elective vs match

Post by ERISA Stone » Sat Jun 10, 2017 3:22 pm

There is a primary benefit to doing the nonelective contribution over the match. If you have the new comparability profit sharing allocation formula (AKA cross-testing) and provide a profit sharing contribution, you have to pass the minimum gateway requirement. This requirement says each eligible NHCE must receive the lesser of 1/3% contribution of the highest HCE, or 5%. For example, if the highest HCE receives 10%, NHCEs should receive at least 3.33%. If the highest HCE is 20%, each NHCE should receive at least 5%.

If you have the nonelective SH contribution, this can go towards meeting the gateway minimum. Suppose the gateway minimum is 5%. If you have already given a 3% nonelective, then you only need to give an additional 2% profit sharing contribution to meet the minimum.

The matching contribution does not help in meeting the minimum. If the gateway minimum were 5%, you would have to give an additional 5% on top of the SH match.

Vanguard Fan 1367
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Joined: Wed Feb 08, 2017 3:09 pm

Re: Employer safe harbor 401k Non elective vs match

Post by Vanguard Fan 1367 » Sat Jun 10, 2017 3:53 pm

clivus wrote:I'm in the process of setting up a Vanguard 401k for my small business. Right now it's being set up as a non-elective 4% to pass Safe Harbor testing. I can't remember why we did 4% non elective instead of the minimum 3%. Also, is there a benefit to doing the non-elective contribution over the 4% basic match or enhanced match?
I have a doctor's office with one nurse practitioner that I make about twice the salary of. The rest of my employees, including my wife, are hourly.
Does Vanguard do this in 2017 or is someone else administering it and using Vanguard? I tried a number of years ago to do this with my dental office but ended up with AXA because in my discussions with Vanguard I got the impression that they didn't do small Dental Office 401ks.

I have a Safe Harbor with a 3 percent non-elective match. Other than the .87 percent annual AUM fee on an S & P 500 index fund I love the plan. Vanguard's percent in a 401K I would think would be much less than .87 with their S & P 500 fund.

Spirit Rider
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Joined: Fri Mar 02, 2007 2:39 pm

Re: Employer safe harbor 401k Non elective vs match

Post by Spirit Rider » Sat Jun 10, 2017 8:13 pm

In case it wasn't clear what ERISA stone was referring to. The census of your office is a prime candidate to take advantage of the new comparability model for profit sharing. This should allow you to make significantly greater profit sharing contributions than your hourly employees. The NP would get a a higher contribution, but yours would still be the greatest. All at a manageable cost to you and grateful hourly employees and a very grateful NP.

My mother always said share the wealth especially when it benefits you.

clivus
Posts: 9
Joined: Mon Jun 29, 2009 9:56 pm

Re: Employer safe harbor 401k Non elective vs match

Post by clivus » Mon Jun 19, 2017 8:55 am

Thank you all very much. I understand it now. I think I did 4% by accident and will lower it to a 3% nonelective. If we activate the profit sharing I can kick it up to 5%

ERISA Stone
Posts: 1382
Joined: Tue Jun 24, 2014 8:54 am

Re: Employer safe harbor 401k Non elective vs match

Post by ERISA Stone » Mon Jun 19, 2017 9:38 am

clivus wrote:Thank you all very much. I understand it now. I think I did 4% by accident and will lower it to a 3% nonelective. If we activate the profit sharing I can kick it up to 5%
To clarify, your obligation would be the 3% safe harbor nonelective contribution. If you choose to do a profit sharing contribution, it is a different source of funds within the plan. Using your example of 5%, you would have:

3% safe harbor nonelective
2% profit sharing

The profit sharing doesn't have to be 100% vested. You can attach another schedule if you prefer.

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