Presented by T.J. Orr, ERPA, QPA, QKA

FREE PASS! 401(k) SAFE HARBOR OPTIONS

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The information contained in this presentation is

accurate as of March 2016

Free Pass!3

Goal: Win-Win for

Employers & Employees

Cost benefit analysis makes sense for employer to provide the promised contributions.

Employees get a guaranteed contribution from their employer, and can supplement with their own contributions.

4

401(k) Plan Design Goal:

A win-win for employers

and employees alike

Agenda5

Challenges of Non-safe Harbor 401(k) Plans

ADP Testing

Top Heavy Minimum Contributions

Free Pass: Three Safe Harbor Options

Safe Harbor Non-elective

Safe Harbor Match

Auto-enrollment Safe Harbor

Beyond the Safe Harbor

Ideal Safe Harbor Candidates

Deadlines

Challenges of Non-SH 401(k) Plans

ADP Testing Top Heavy Minimum

Contributions to

Non-Key Employees

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ADP Testing

Challenges of Non-SH 401(k) Plans7

ADP Testing

The utilization of the 401(k) component of the plan is measured separately for the HCE group vs. the NHCE group.

NHCE utilization dictates the HCEs’ permissible utilization.

Testing impacted by:

The number of participating eligible participants, and

The rate of pay contributed

Pre-tax 401(k) and Roth 401(k) are treated the same.

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Testing Groups9

The HCE Group10

The NHCE Group11

Example of a Failed ADP Test

Pay 401(k) Catch-UpNet of

Catch-UpDeferral % ADP

HCE A 44,000 24,000

Maximum(6,000)

Maximum18,000 40.91%

23.85%

HCE B 265,000 24,000

Maximum(6,000)

Maximum18,000 6.79%

Total

HCE47.7% ÷ 2

NHCE 1 18,000 -- -- -- 0%

2.5%

NHCE 2 37,000 1,480 -- 1,480 4%

NHCE 3 69,000 4,140 -- 4,140 6%

NHCE 4 30,000 -- -- -- 0%

Total

NHCE10% ÷ 4

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Example of a Failed ADP Test

ADP

NHCE ADP 2.5%

HCE ADP is Limited to Lesser of:

2+ (plus) the ADP of the NHCEs 4.5%

2x (times) the ADP of the NHCEs 5.0%

Maximum HCE ADP 4.5%

Actual HCE ADP 23.85%

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ADP Test Fails!

Correcting the Failed ADP Test

Option 1: Making employer

QNEC contribution to NHCEs

Qualified Non-Elective

Contribution is 100% vested

immediately

Cannot be used in other non-

discrimination testing on non-

elective contributions (to be

discussed later in

presentation)

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401(k) Plan

Correcting the Failed ADP Test

Option 2: Refunding / taxable distribution to HCE

Refund will be made to 1 or more HCEs who deferred the highest dollar amount

Must be refunded with earnings.

Taxable income to individual in year of distribution.

No penalty assessed to participant.

If distributed more than 2 ½ months (or 6-months if EACA) after plan year end, 10% penalty on employer, paid via Form 5330;

Failure must be corrected by the last day of the following plan year (unless corrected under EPCRS, which is more expensive).

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401(k) Plan$$$

$$$

Top Heavy Minimum Contributions to

Non-Key Employees

Challenges of Non-SH 401(k) Plans16

Key & Non-Key Employees

Key Employees:

Owners of more than 5%

Owners of more than 1% and compensation exceeding $150,000

Officers with compensation exceeding $170,000

Ownership attribution rules apply

Non-Key Employees:

Those who are not Key

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Example of a Top Heavy Plan

YEAR 1Key

EEPay 401(k) Total

% of Total Assets

HCE A Yes 44,000 24,000

48,000 89.5%HCE B Yes 265,000 24,000

NHCE 1 No 18,000 --

5,620 10.5%

NHCE 2 No 37,000 1,480

NHCE 3 No 69,000 4,140

NHCE 4 No 30,000 --

Total 53,620

More than 60%

of the plan’s

assets are held

by the Key EEs.

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Example of a Top Heavy Plan19

When a plan is top heavy, the non-key employees

(employed on the last day of the plan year) must receive an

employer contribution*, the rate of which is the lesser of:

The greatest allocation % to any key employee, including via their

elective deferral contributions, or

3%.

*The applicable contribution rate must be applied to the non-key EE’s

annual pay.

YEAR 1Key

EEPay 401(k) Deferral %

HCE A Yes 44,000 24,000 54.5%

HCE B Yes 265,000 24,000 9.1%

Here, non-key employees receive 3% of annual pay.

Top Heavy Minimum

Contribution

YEAR 1 StatusKey

EEPay 401(k)

Top Heavy

Contribution

(3% to non-keys)

HCE A Active Yes 44,000 24,000 --

HCE B Active Yes 265,000 24,000 --

NHCE 1 Terminated No 18,000 -- --

NHCE 2 Active No 37,000 1,480 1,110

NHCE 3 Active No 69,000 4,140 2,070

NHCE 4 Active No 30,000 -- 900

Total 4,080

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401(k) Safe Harbor Options

Free Pass!21

Safe Harbor

401(k) Plan

Free Pass!

Safe harbor 401(k) plans provide free passage

of ADP Testing and Top Heavy Minimum

Contribution Requirements!

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ADP/ACP

Safe Harbor

Match

ADP Safe

Harbor

Non-elective

Three Safe Harbor Options23

Auto-enroll

ADP/ACP

Safe Harbor

(QACA)

ADP/ACP

Safe Harbor

Match

ADP Safe

Harbor

Non-elective

Safe Harbor Non-elective24

Auto-enroll

ADP/ACP

Safe Harbor

(QACA)

Safe Harbor Non-Elective

No less than 3% of participation compensation

Not a matching contribution

Contribution generally must be provided to allNHCEs, regardless of their rate of deferral (including 0%).

Pairs well with additional non-elective contributions (aka profit sharing) for non-discrimination testing purposes.

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401(k) Plan

3%

Safe Harbor Non-Elective

Pay 401(k) SH NE (3%) Total

HCE A 44,000 24,000

Maximum-- 24,000

HCE B 265,000 24,000

Maximum-- 24,000

HCE Total 48,000 -- 48,000

NHCE 1 18,000 -- 540 540

NHCE 2 37,000 2,200 1,110 3,310

NHCE 3 69,000 4,140 2,070 6,210

NHCE 4 30,000 -- 900 900

NHCE Total 6,340 4,620 10,960

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Safe Harbor Non-Elective

Pay 401(k) SH NE (3%) Total

HCE A 44,000 24,000

Maximum1,320* 25,320

HCE B 265,000 24,000

Maximum7,950* 31,950

HCE Total 48,000 9,270 57,270

NHCE 1 18,000 -- 540 540

NHCE 2 37,000 2,200 1,110 3,310

NHCE 3 69,000 4,140 2,070 6,210

NHCE 4 30,000 -- 900 900

NHCE Total 6,340 4,620 10,960

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*Optional

Auto-enroll

ADP/ACP

Safe Harbor

(QACA)

ADP/ACP

Safe Harbor

Match

ADP Safe

Harbor

Non-elective

Safe Harbor Match28

Safe Harbor Match

Basic Match

100% match on first 3% deferred, plus 50% match on next 2%, or

Enhanced Match

Commonly set at 100% match on first 4% deferred (must be at least as great as basic match at each rate of deferral)

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

6% Deferral 5% Deferral 4% Deferral

Basic vs. Enhanced Safe Harbor Match

Deferral

Basic

Enhanced

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Safe Harbor Match

Pay 401(k) Deferral %Enhanced SH

Match (4%)Total

HCE A 44,000 24,000

Maximum54.54% 1,760 25,760

HCE B 265,000 24,000

Maximum9.06% 10,600 34,600

HCE Total 48,000 12,360 60,360

NHCE 1 18,000 -- 0% -- --

NHCE 2 37,000 1,480 4% 1,480 2,960

NHCE 3 69,000 4,140 6% 2,760 6,900

NHCE 4 30,000 -- 0% -- --

NHCE Total 5,620 4,240 9,860

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Allocation Periods31

Individual Pay Period

AllocationPlan Year Allocation

Deferrals and Pay

ConsideredFor the pay period only For the entire plan year

Matching deposits dueLast day of the following

quarter

Last day of the following plan

year

Employer & employee

benefit from routine

cash flow

Yes

Deposits still permissible each

pay period, and may be based

on individual pay period

allocation with true up at year

end, or based on year-to-date

data

Can TPA accurately

confirm computations/

deposits?

Less likely to do so More likely to do so

If participant delays

contribution

May miss out on matching

contributions

Retain ability to maximize

matching contributions

Allocation Period Example32

Month

$100,000

Salary Deferral

Deferral

%

Deferrals Subject

to Match (4% of

Monthly Salary) Match

Jan 8,333.33 1,500.00 18.0% 333.33 333.33

Feb 8,333.33 1,500.00 18.0% 333.33 333.33

Mar 8,333.33 1,500.00 18.0% 333.33 333.33

Apr 8,333.33 1,500.00 18.0% 333.33 333.33

May 8,333.33 1,500.00 18.0% 333.33 333.33

Jun 8,333.33 1,500.00 18.0% 333.33 333.33

Jul 8,333.33 1,500.00 18.0% 333.33 333.33

Aug 8,333.33 1,500.00 18.0% 333.33 333.33

Sep 8,333.33 1,500.00 18.0% 333.33 333.33

Oct 8,333.33 1,500.00 18.0% 333.33 333.33

Nov 8,333.33 1,500.00 18.0% 333.33 333.33

Dec 8,333.33 1,500.00 18.0% 333.33 333.33

100,000.00 18,000.00 4,000.00 4,000.00

Individual

Pay

Period

Allocation

Plan Year

Allocation

Total

Deferrals

Deferrals Subject to Match

(i.e. 4% of Annual Pay) Match

18,000.00 4,000.00 4,000.00

Allocation Period Example33

Month

$100,000

Salary Deferral

Deferral

%

Deferrals Subject

to Match (4% of

Monthly Salary) Match

Jan 8,333.33 - 0.0% - -

Feb 8,333.33 - 0.0% - -

Mar 8,333.33 - 0.0% - -

Apr 8,333.33 - 0.0% - -

May 8,333.33 - 0.0% - -

Jun 8,333.33 - 0.0% - -

Jul 8,333.33 3,000.00 36.0% 333.33 333.33

Aug 8,333.33 3,000.00 36.0% 333.33 333.33

Sep 8,333.33 3,000.00 36.0% 333.33 333.33

Oct 8,333.33 3,000.00 36.0% 333.33 333.33

Nov 8,333.33 3,000.00 36.0% 333.33 333.33

Dec 8,333.33 3,000.00 36.0% 333.33 333.33

100,000.00 18,000.00 2,000.00 2,000.00

Individual

Pay

Period

Allocation

Plan Year

Allocation

Total

Deferrals

Deferrals Subject to Match

(i.e. 4% of Annual Pay) Match

18,000.00 4,000.00 4,000.00

Auto-enroll

ADP/ACP

Safe Harbor

(QACA)

ADP/ACP

Safe Harbor

Match

Auto-enrollment Safe Harbor34

ADP Safe

Harbor

Non-elective

Auto-enrollment

Safe Harbor35

6%

100% match on first 1%

50% match on next 5%

0%

1%

2%

3%

4%

5%

6%

7%

Sample Employee Deferral Auto-enroll Safe Harbor

Safe Harbor Match for Plans With Auto-enrollment

Auto-enrollment

Safe Harbor

For this Qualified Automatic Contribution

Arrangement (QACA):

Minimum and maximum rates of auto deferral and

auto escalation apply to plan years as follows:

1-2 – not less than 3%

3 – not less than 4%

4 – not less than 5%

5 – not less than 6% and no more than 10%

6 and thereafter – same

May wish to start at 6% without escalation for ease of

administration

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Auto-enrollment

Safe Harbor

For this Qualified Automatic Contribution

Arrangement (QACA):

100% vesting after 2 Years of Service rather

than immediate for non-QACA safe harbors

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Add Auto-enrollment

Safe Harbor

Pay 401(k)Deferral

%

Auto-enroll SH Match

Total

HCE A 44,000 24,000

Maximum54.5% 1,540 25,540

HCE B 265,000 24,000

Maximum9.1% 9,275 33,275

HCE Total 48,000 10,815 58,815

NHCE 1 18,000 -- 0% -- --

NHCE 2 37,000 1,480 4% 925 2,405

NHCE 3 69,000 4,140 6% 2,415 6,555

NHCE 4 30,000 -- 0% -- --

NHCE Total 5,620 3,340 8,960

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Additional Safe Harbor

Requirements

Notice: Participants must be notified within a reasonable period of time prior to the plan year beginning. This drives the year-end deadline to amend for next year’s provisions. 30-days notification deemed to be reasonable.

Documentation: Plan document must specify safe harbor formula

Vesting: Contribution 100% vested immediately (other than auto-enrollment safe harbor, which vests over 2 years)

Recipients of Contribution: Generally, all NHCEs must receive contribution Cannot condition contribution on anything, such as

employment on last day nor minimum hours worked

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Summary –

Case Study40

Contributions

HCEs 57,270

NHCEs 4,620 92.5%

7.5%HCEs

NHCEs

Contributions

HCEs 60,360

NHCEs 4,240 93.4%

6.6%HCEs

NHCEs

Contributions

HCEs 58,815

NHCEs 3,340 94.6%

5.4%HCEs

NHCEs

Summary –

Vesting & Minimum Contributions

At least 3% contribution to all

NHCEs

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Basic - 100% match on first 3%

plus 50% match on next 2%, or

Enhanced - Commonly 100%

match on first 4%; not less than

basic; ACP if more than 6%

100% match on first 1% plus

50% match on next 5%

100%

Immediate

Vesting

100%

Immediate

Vesting

YOS<2 = 0%

YOS≥2 = 100%

YOS = Years of Service = generally 1,000 Hours of Svc in Plan Year

Summary –

Auto-Enrollment42

Is Auto-Enrollment

Required?

Optional

Optional

Yes. Mandatory.

Roth?

Optional

Optional

Optional

Additional Non-elective Contributions

Other Methods to Increase

Owner Allocations43

Additional Non-Elective

Contributions

On top of these safe harbor options, the

employer has the option to add a non-

elective contribution (aka “profit sharing”)

Subject to non-discrimination testing, unless

uniform allocation

ADP test is still satisfied by safe harbor

contribution

Top Heavy testing is no longer bypassed

A vesting schedule can apply

Contribution is discretionary

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Additional Non-Elective

Contribution

Pay 401(k) SH NE (3%)

HCE A 44,000 24,000

Maximum--

HCE B 265,000 24,000

Maximum--

HCE Total 48,000

NHCE 1 18,000 -- 540

NHCE 2 37,000 2,200 1,110

NHCE 3 69,000 4,140 2,070

NHCE 4 30,000 -- 900

NHCE Total 6,340 4,620

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Pay 401(k) SH NE (3%)NE (aka

PS at 9%)Total

HCE A 44,000 24,000

Maximum-- 3,960 27,960

HCE B 265,000 24,000

Maximum-- 23,850 47,850

HCE Total 48,000 27,810 75,810

NHCE 1 18,000 -- 540 -- 540

NHCE 2 37,000 2,200 1,110 -- 3,310

NHCE 3 69,000 4,140 2,070 -- 6,210

NHCE 4 30,000 -- 900 -- 900

NHCE Total 6,340 4,620 10,960The non-elective contributions as a whole are not uniform, so non-discrimination testing is required.

Illustration results may vary based on demographics, including age.

Getting HCEs to $59,000 via

Non-Elective Contributions

Pay 401(k)SH NE (3%)

HCE A 44,000 24,000

Maximum--

HCE B 265,000 24,000

Maximum--

HCE Total 48,000

NHCE 1 18,000 -- 540

NHCE 2 37,000 2,200 1,110

NHCE 3 69,000 4,140 2,070

NHCE 4 30,000 -- 900

NHCE Total 6,340 4,620

Illustration results may vary based on demographics, including age.

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Pay 401(k)SH NE (3%) NE (2% for

NHCEs)Total

HCE A 44,000 24,000

Maximum--

26,000

Maximum50,000

HCE B 265,000 24,000

Maximum--

35,000

Maximum59,000

HCE Total 48,000 61,000 109,000

NHCE 1 18,000 -- 540 360 900

NHCE 2 37,000 2,200 1,110 740 4,050

NHCE 3 69,000 4,140 2,070 1,380 7,590

NHCE 4 30,000 -- 900 600 1,500

NHCE Total 6,340 4,620 3,080 14,040

Three Years Later47

401(k)SH NE

(3%)NE (2% for

NHCEs)Total 3 Years Later

HCE

Total 48,000 -- 61,000 109,000

$369,120*

NHCE Total 6,340 4,620 3,080 14,040

Grand

Total 54,340 4,620 64,080 123,040

* Total flow of dollars contributed to the plan over

three years, unadjusted for investment performance

Discretionary Matching Contributions

Other Methods to Increase

Owner Allocations48

Discretionary Match

Matching contributions are typically subject to Average Contribution % Test (ACP Test) Similar to ADP testing

Contribution Percentage = Match ÷ Pay

Failed testing results in distribution of vested portion of match and forfeiture of non-vested match.

Less likely to fail when formula provides for caps on % of deferrals subject to match.

May be subject to vesting schedule

May be declared and funded after close of plan year.

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Discretionary Match

When combined with SHM or SHNE, receives automatic passage of ACP testing, and bypass of top heavy minimums, provided:

Salary deferral contributions in excess 6% of pay are disregarded;

Match does not exceed 4% of pay;

Rate of match does not increase as rate of deferral increases; and

There is not a requirement for employment on last day nor minimum hours worked.

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Add Discretionary Match to

Safe Harbor Match51

Pay 401(k)Deferral

%Enhanced SH Match

HCE A 44,000 24,000

Maximum54.54% 1,760

HCE B 265,000 24,000

Maximum9.06% 10,600

HCE

Total 48,000 12,360

NHCE 1 18,000 -- 0% --

NHCE 2 37,000 1,480 4% 1,480

NHCE 3 69,000 4,140 6% 2,760

NHCE 4 30,000 -- 0% --

NHCE

Total 5,620 4,240

Pay 401(k)Deferral

%Enhanced SH Match

Disc.

Match (4%)Total

HCE A 44,000 24,000

Maximum54.54% 1,760 1,760 27,520

HCE B 265,000 24,000

Maximum9.06% 10,600 10,600 45,200

HCE

Total 48,000 12,360 12,360 72,720

NHCE 1 18,000 -- 0% -- -- --

NHCE 2 37,000 1,480 4% 1,480 1,480 4,440

NHCE 3 69,000 4,140 6% 2,760 2,760 9,660

NHCE 4 30,000 -- 0% -- -- --

NHCE

Total 5,620 4,240 4,240 14,100

Yet Another Matching Contribution

Other Methods to Increase

Owner Allocations52

Yet Another Matching

Contribution53

SH Match + Discretionary Match + Fixed Match

Pay $265,000

401(k)24,000

Maximum

SH Match $10,600 100% vested immediately

Disc. Match $10,600

Deferrals in excess 6% of pay disregarded;

Match cannot exceed 4% of pay; Vesting

schedule applies.

Fixed Match $13,800

Cannot match deferrals in excess of 6% of

pay, but 4% cap does not apply. The rate of

the fixed match is adjusted for the limitations

applicable to the plan year. Vesting schedule

applies.

Total$59,000

MaximumThe 2016 annual additions limit is $59,000.

Pay 401(k)Deferral

%Enhanced

SH Match

Disc.

Match

(4%)

HCE A 44,000 24,000

Maximum54.54% 1,760 1,760

HCE B 265,000 24,000

Maximum9.06% 10,600 10,600

HCE

Total 48,000 12,360 12,360

NHCE 1 18,000 -- 0% -- --

NHCE 2 37,000 1,480 4% 1,480 1,480

NHCE 3 69,000 4,140 6% 2,760 2,760

NHCE 4 30,000 -- 0% -- --

NHCE

Total 5,620 4,240 4,240

Add Discretionary Match to

Safe Harbor Match54

Pay 401(k)Deferral

%Enhanced

SH Match

Disc.

Match

(4%)

Fixed

Match

(86.67% of

First 6%)

Total

HCE A 44,000 24,000

Maximum54.54% 1,760 1,760 2,290 29,810

HCE B 265,000 24,000

Maximum9.06% 10,600 10,600 13,800 59,000

HCE

Total 48,000 12,360 12,360 16,090 88,810

NHCE 1 18,000 -- 0% -- -- -- --

NHCE 2 37,000 1,480 4% 1,480 1,480 1,285 5,725

NHCE 3 69,000 4,140 6% 2,760 2,760 3,590 13,250

NHCE 4 30,000 -- 0% -- -- -- --

NHCE

Total 5,620 4,240 4,240 4,875 18,975

Ideal Candidates for a Safe Harbor

401(k) Plan55

Ideal Safe Harbor

Candidates

Owners interested in maximizing contributions

They’re simply fully vesting a portion of what they

were going to contribute anyway

Top heavy 401(k) Plans

Budget conscious employers seeking

predictable contributions

Employers dedicated to providing generous,

guaranteed contributions to employees

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1 2 3 4 5 6 7 8 9 10 11 12

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Safe Harbor Deadlines

Startup

401(k) Plans

Month

Profit

Sharing Only

Plans Adding

a 401(k)

Prospective

plan amendments

for existing 401(k)

plans

Collaboration58

We strongly value collaboration, which means…

We Are a Part of

Your Team

We Are Committed to

Your Continued Success

We Listen and Offer

Customized Solutions

We Respond Quickly

to Your Needs

About Pinnacle Plan Design

Retirement Plan Design and Administration At Pinnacle Plan Design, we collaborate with employers and their advisors to design and administer retirement plans that turn tax dollars into retirement benefits.

Qualified retirement plans, such as 401(k) plans and defined benefit plans offer business owners and executives the ability to reduce current tax liabilities, help ensure their personal retirement plans stay aligned with firm goals, and provide a benefit to recruit and retain the talent needed to grow their business.

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Retirement Plan Design▲Administration▲Consulting▲Actuarial Services

www.pinnacle-plan.com

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Robbie Petrillo, QKAPlan Opportunity Consultantrpetrillo@pinnacle-plan.com

(520) 618-1305