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Safe Harbor 401(k)


Guest Mac Lewis
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My suggestion from the original post was that you don't suspend the match as the penalty, but instead suspend the on-going ability to make after-tax contributions (for 6 months).

That way, if you continue to match pre-tax, you won't run afoul of the safe harbor requirements and there is no elimination of an optional form of benefit.

[This message has been edited by ndt123 (edited 11-06-98).]

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NDT123 -

I don't believe your suggestion to suspend the participant's right to make after-tax contributions will satisfy the IRS requirement to "impose a substantial limitation on the right of participants to withdraw their own contributions". See rev-ruling 74-55 and 74-56.

Kazimer -

Why don't you impose a24 month holdback on the withdrawal of after-tax contributions. Then, no penalty would be necessary.

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Guest kazimer

LCARUSI,

Your post is exactly right as to my problem with ndt123's suggestion on the suspension point.

I would definitely switch to the 24-month holdback approach you suggest (or the requirement of attainment of a stated age, etc.), except that I think that then gets me into an anticutback bind. Right now, I let somebody take out contributions made at any time, including in the last 24 months, but I apply the suspension. I don't think I can swap the suspension for the 24-month holdback, because that would deprive participants of the right they have today to withdraw contributions made in the last 24 months. It seems like a real catch-22.

Mary Ellen Kazimer

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Mary Ellen -

Two thoughts on this:

1) Impose a 24 month holdback on a PROSPECTIVE basis. I believe this avoids the anti-cutback problem. If you start it on 1/1/99, there would be a holdback of January contributions for a withdrawal in February; there would be a holdback of January and February contributions for a withdrawal in March etc. By 1/1/2001, you have a full twenty four month holdback and there is no need for any match suspension penalty in the plan.

You then go safe harbor as of 1/1/2001.

2) Ask the IRS for guidance. Not many 401(k)Plans allow after-tax contributions. Not a lot of thought, therefore, was given to the complications associated with after-tax contributions. Maybe they would allow you to waive the suspension in the two year period that you are establishing the 24 month holdback enabling you to go safe harbor immediately?

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Guest kazimer

LCARUSI

Thanks for your latest. #2 gives me something to suggest to IRS if they don't agree that the guidance should be fixed so that my problem isn't one. #1 gives me something to do if I can't convince IRS that there's no problem or that they should OK #2.

Mary Ellen Kazimer

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Guest Laura Millwood

I need a clarification on safe harbors. Since it must be "hardwired" into your plan document that you are choosing to pass the ADP under tradition rules or safe harbor rules, if the employer realizes well into the year that he cannot afford the match or nonelective that he has chosen, can he amend out of safe harbor status as long as he is within the notice guidelines? We have some clients wary of the safe harbors because they are required contributions.

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