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jkharvey

"Bad" 401(k) safe harbor notice?

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Here's the scenario. Employer gave a safe harbor notice indicating that the 3% safe harbor contribution would be made into the monoey purchase plan. The MPP, however, has an integrated formula, 3% base w/ 3% of excess. The employer intended to use the 3% base as the safe harbor contribution. The employer, however, has passed the ADP/ACP tests w/out consideration of any Safe Harbor provisions. Can we simply consider our Notice as "bad" and leave the 401(k) plan as it is w/ passing the ADP/ACP tests and leave the MPP contribution as it is? Of course, the 3% base MPPP contribution should be 100% vested because of the notice to the employees. We would like to avoid the ER having to put in another 3% into the MPPP.

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I have a client with a major national service provider that wanted to make a similar argument (their facts were a little different, in that they went Safe Harbor in 1999, but didn't make their 2000 notice timely, and wanted to take advantage of the delayed notice option available to new Safe Harbor plans in 2000). In this case, the service provider made the argument that deficiencies in the notice drafted for 1999 meant that the plan wasn't safe harbor in 1999 (it passed the tests), so could be construed as a new safe harbor plan in 2000. Of course, this wasn't run by the IRS, but there seems to be some precedent for the practice of considering a notice as a "bad" notice.

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Jon C. Chambers

Principal

Schultz Collins Lawson Chambers, Inc.

(415) 291-3004

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