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What is to prevent a SH 401(k) from having a month of service on deferrals;YOS on SH Match?


kwalified

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a large 401(k) had a Year of Service eligibility across the board. It is deferrals and SH Match only. They want to make the deferral eligibility a Month of Service and maintain the YOS for the SH Match. I can not think of anything that would prevent this aside from greater administration detail. Keeping up with those who are eligible for deferral only and those who are eligible for both.

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:o

a large 401(k) had a Year of Service eligibility across the board. It is deferrals and SH Match only. They want to make the deferral eligibility a Month of Service and maintain the YOS for the SH Match. I can not think of anything that would prevent this aside from greater administration detail. Keeping up with those who are eligible for deferral only and those who are eligible for both.

If the plan is top heavy, the safe harbor exemption would not apply. You would be required to provide a top heavy minimum to those eligible to make salary deferrals and not eligible for match.

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:o
a large 401(k) had a Year of Service eligibility across the board. It is deferrals and SH Match only. They want to make the deferral eligibility a Month of Service and maintain the YOS for the SH Match. I can not think of anything that would prevent this aside from greater administration detail. Keeping up with those who are eligible for deferral only and those who are eligible for both.

If the plan is top heavy, the safe harbor exemption would not apply. You would be required to provide a top heavy minimum to those eligible to make salary deferrals and not eligible for match.

Thanks Kathy. Plan is not TH only a couple/few key ee's. Of course, that would be something to keep a keen eye on.

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If you are looking at doing this mid-year, you might have an issue with 1.401(k)-3(e)(1)'s prohibition of mid-year amendments to safe harbor provisions. For example, if the current document says everyone eligible to defer receives the safe harbor contribution and you amend it so only those 21 & 1 receive the SH. There is no guidance regarding whether it is considered amending the SH provisions if the provisions change but the same people are eligible both before and after the amendment. Personally, I think that kind of change would be prohibited a mid-year amendment and I would make the change at the beginning of next year.

However, if for example the document currently says the SH contribution eligibility is the same as the 21 & 1 match eligibility and you are only amending the deferral eligibility, I think you are ok with a mid-year change.

Am I splitting hairs? Yes. Is it illogical? Yes. But, then we are dealing with IRS regulations. I'm sure others will have differing opinions.

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:lol:

Is not a 401(k) Plan that provides ONLY employee salary deferral and SH match "deemed" NOT to be top-heavy - or am I thinking of something else?

Revenue Ruling 2004-13 clarified rules for a 401(k) safe-harbor plan to be exempt from being top heavy

This guidance made it clear that the determination of whether a plan is exempt from the top-heavy rules is to be re-determined each year. In all the examples in the ruling, the safe-harbor matching contribution is used to illustrate satisfying the top-heavy exemption; note that the safe-harbor nonelective contribution may also be used.

This ruling clarified through specific scenarios when a safe-harbor plan is exempt from being top heavy and when it is not.

The safe-harbor 401(k) matching contribution plan will not be exempt from being top heavy:

1. When the employer makes a discretionary nonelective contribution;

2. When forfeitures are allocated to participants accounts in the same manner as nonelective contributions; and

3. When employees are eligible to make elective deferrals upon hire but are not eligible for the match until after one year of service is completed. This is explained in detail below. According to the ruling, a safe-harbor 401(k) plan will not be exempt from the top-heavy rules if it permits immediate or short eligibility for an employee to enter the plan for elective deferrals, but imposes a longer service requirement for the employee to enter the plan to receive safe-harbor matching contributions.

I am not aware that this rule as changed. Can anyone else confirm?

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If they amended to allow for 1 month of service on deferrals and it was NOT TH, it would still consider satisfying NonDiscrimination due to basic SH match, yes?

Amendments to Safe Harbor plans mid year are tricky. Amendments to the plan during that plan year that effect the plan design generally are prohibited. Although there is some thought that expanding coverage under a safe harbor plan during the year may be ok. But you are only changing coverage for salary deferral and not the safe harbor match.

I would like to hear others' opinions on this.

Nothing is ever simple....

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so far at every ASPPA Conference the IRS folks have been pretty firm in voicing their opinion the only changes permitted to a safe harbor during the year are

1. adding a Roth election

2. adding funeral expenses for hardship

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What part of "must remain in place for the entire 12 month safe harbor plan year" is unclear to you soldier? Well, let's see here, uh . . .

How about these?

The business address is on the safe harbor notice and the plan has the company address right in the adoption agreement. So, if you have a safe harbor plan, don't amend the adoption agreement to change your business address mid-year - you can only move to a new place on the first day of the plan year (hope it's a work day). Plan name too, of course - changing that would certainly blow safe harbor status. If that plan name hadn't changed, I know my deferral elections would have been different.

Or this one?

A safe harbor plan has discretionary profit sharing and uses forfeitures, if any, to pay reasonable expenses first (if not paid by the employer) and then to offset employer contributions. The plan language explains that the forfeitures are only available for use in the year following the year in which the forfeitures occurred. This plan cannot be amended mid-year to use forfeitures in the current year?

No cigar here?

Suppose the safe harbor 401(k) plan has been allocating a discretionary profit sharing on a uniform percent of pay basis to all eligible participants each year, and they intend to continue to operate in that fashion. Can the plan be changed from "each in their own class" to "pro-rata" or vice versa (since each of these allow excatly that same uniform allocation option)? Any takers?

Earnings?

If you're safe harbor, can you change from a balance forward earnings allocation method to an individual-directed plan mid-year (can you move to a platform) - or must the assets transfer on the first day of the plan year (if it's a holiday, you may need to pay overtime). Actually, maybe here they should just stay balance forward to avoid the new/improved 404(a) rules.

Another?

Oh those pesky top paid group elections - the huge number of deferral changes that occur when the plan is amended to change that provision!

Can the trustees be changed mid-year? too risky - keep the old ones in charge of the plan until the end of the year.

Source to be used for cash-out forfeiture restoration, changing the legal jurisdiction from one state to another, modifications for top heavy to coordinate with the adoption of a DB plan? There's much more - shall we continue?

I think the IRS said they have no plans to provide guidance on this issue, so you'll have to draw your own conclusions here - are some comments merely facetious? Or are they real? I wish I knew!

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I heard something different at those conferences. I heard the IRS representatives say they are not going to issue additional guidance about mid-year amendments to SH plans. I have never heard an IRS representative say that adding Roth and hardships for funeral expenses are the only mid-year amendments that can be made mid-year.

To me, the original guidance in the Regs is very clear in saying the mid-year amendment prohibition applies to provisions that satisfy any of the safe harbor rules.

Except as provided in this paragraph (e) or in paragraph (f) of this section, a plan will fail to satisfy the requirements of sections 401(k)(12), 401(k)(13), and this section unless plan provisions that satisfy the rules of this section are adopted before the first day of the plan year and remain in effect for an entire 12-month plan year. In addition, except as provided in paragraph (g) of this section, a plan which includes provisions that satisfy the rules of this section will not satisfy the requirements of §1.401(k)-1(b) if it is amended to change such provisions for that plan year. Moreover, if, as described under paragraph (h)(4) of this section, safe harbor matching or nonelective contributions will be made to another plan for a plan year, provisions under that other plan specifying that the safe harbor contributions will be made and providing that the contributions will be QNECs or QMACs must also be adopted before the first day of that plan year.
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Announcement 2007-59 was the IRS 'blessing' on adding Roth and hardship mid-year to an existing safe harbor

This announcement provides that a plan will not fail to satisfy the

requirements to be a § 401(k) safe harbor plan merely because of mid-year

changes to implement a qualified Roth contribution program (as defined in

§ 402A) or the hardship withdrawals described in part III of Notice 2007-7.

Comments are requested as to whether additional guidance is needed

with respect to mid-year changes to a § 401(k) safe harbor plan (other than

changes described in this announcement or in § 1.401(k)-3(f) of the Income Tax

Regulations (relating to mid-year amendments to become a safe harbor plan

using nonelective contributions) and § 1.401(k)-3(g) (relating to mid-year

amendments to suspend or reduce safe harbor matching contributions)).

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I may be the only one, but I didn't see Announcement 2007-59 as telling me anything I didn't already know. There is no mention of Roth in either 1.401(k)-3 or 1.401(m)-3. Likewise, I don't see any requirements for hardship provisions in either reg. To me, that means Roth provisions and Hardship provisions are not "provisions that satisfy the rules of this section", with section meaning 1.401(k)-3 and 1.401(m)-3, so the mid-year prohibition doesn't apply.

The IRS has said at conferences that they have received requests for additional guidance, but will not be issuing any. Since they are not going to issue any more guidance, we can only rely on what we have.

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I may be the only one, but I didn't see Announcement 2007-59 as telling me anything I didn't already know. There is no mention of Roth in either 1.401(k)-3 or 1.401(m)-3. Likewise, I don't see any requirements for hardship provisions in either reg. To me, that means Roth provisions and Hardship provisions are not "provisions that satisfy the rules of this section", with section meaning 1.401(k)-3 and 1.401(m)-3, so the mid-year prohibition doesn't apply.

The IRS has said at conferences that they have received requests for additional guidance, but will not be issuing any. Since they are not going to issue any more guidance, we can only rely on what we have.

Well, just last week, during the IRS Q & A at ASPPA BCOS in Atlanta, they said specifically no amendments other than Roth & Hardship. Anything else would be challenged by them on audit.

William C. Presson, ERPA, QPA, QKA
bill.presson@gmail.com
C 205.994.4070

 

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no amendments other than Roth & Hardship. Anything else would be challenged by them on audit.

Anything. Yeah. Sit still and don't make a sound. See, it's that kind of thing that makes a colleague in the office ask if we should fear the IRS and have I read 1984. Fear could include reverential awe, so maybe scared is better, but I've not read 1984, so not sure that applies here.

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a large 401(k) had a Year of Service eligibility across the board. It is deferrals and SH Match only. They want to make the deferral eligibility a Month of Service and maintain the YOS for the SH Match. I can not think of anything that would prevent this aside from greater administration detail. Keeping up with those who are eligible for deferral only and those who are eligible for both.

You'll find the answer to your question in Treas. Reg. 1.401(k)-3©(4) Limitation on HCE matching contributions which says "The safe harbor matching contribution requirement of this paragraph © is not satisfied if the ratio of matching contributions made on account of an HCE's elective contributions under the cash or deferred arrangement for a plan year to those elective contributions is greater than the ratio of matching contributions to elective contributions that would apply with respect to any eligible NHCE with elective contributions at the same percentage of safe harbor compensation."

In plain English - if an HCE gets a higher matching-to-deferrals ratio than ANY NHCE who defers the same percentage of compensation, then the plan doesn't meet the safe harbor matching requirement.

If you have a participant who meets the one-month deferral eligibilty requirement, makes deferrals and doesn't get a match, then their ratio of matching contributions to deferrals is 0%. That would then be the highest ratio of matching contributions to deferrals that all HCEs could receive and still meet the safe harbor requirement. If the NHCE becomes eligible for matching contributions mid-year and only receives contributions from that point on (but deferred the entire year), then the most any HCE could receive is the same ratio as that NHCE.

In other words, a plan could presumably have a one month eligiblity requirement for deferrals and one year requirement for match only if HCEs are excluded (by plan provision) from receiving a matching contribution and/or the matching contribution for HCEs is tied to the lowest matching ratio of any NHCE.

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00hskrgrl, you are not taking into account that you are allowed to permissively disaggregate otherwise excludables into a separate plan for testing purposes. Under the scenario under discussion, the "plan" containing the otherwise excludables would not be SH, but the "plan" containing the non-excludables would be SH.

Bill, I've heard some bizarre things said by government representatives, but that one takes the cake. I see a lot of TAM requests in their future if they pull that garbage in audits.

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Bill, I've heard some bizarre things said by government representatives, but that one takes the cake. I see a lot of TAM requests in their future if they pull that garbage in audits.

I agree that it doesn't make sense. However, there were a whole lot of well respected ERISA attys in attendance and it wasn't really challeged; Ilene Ferenczy, Robert Richter, Steve Forbes, Sheldon Smith, etc.

Next time we can video conference in Larry Starr and let him challenge.

William C. Presson, ERPA, QPA, QKA
bill.presson@gmail.com
C 205.994.4070

 

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Was that response in the Q&A handout, or addressed at the podium? You have me really wanting to hear the tape on this one.

I'm really surprised on one objected to a major shift on such a huge issue. After all, the consequence of an improper amendment is disqualification, not just the loss of SH status.

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QUOTE (Kevin C @ May 24 2012, 09:09 AM) *

Bill, I've heard some bizarre things said by government representatives, but that one takes the cake. I see a lot of TAM requests in their future if they pull that garbage in audits.

I agree that it doesn't make sense. However, there were a whole lot of well respected ERISA attys in attendance and it wasn't really challeged; Ilene Ferenczy, Robert Richter, Steve Forbes, Sheldon Smith, etc.

Next time we can video conference in Larry Starr and let him challenge.

There was wrong and questionable stuff said by both government and ASPPA speakers at the Mid-Atlantic conference Q&A. I wouldn't pay much attention unless it comes from the Annual conference, where most of the questions are written out ahead of time and discussed ahead of time by high-level IRS personnel. (Of course we've heard some questionable stuff there nevertheless, but at least it's worth talking about.)

Ed Snyder

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how is this a "major" shift? the last 3 years this question has been asked at the ASPPA Conferences and the response has been consistent the only changes were Roth and hardship.

Note :2011 indicated it would be discussed from the podium, so perhaps that is available.

It is very common to want to restate a safe harbor takeover plan to

our document mid-year. We are currently telling clients we cannot

make any changes to a SH plan other than adding Roth and

expanding hardships, until the beginning of the next plan year. If the

change does not affect the CODA portion of the plan (i.e.. the

401(k) deferrals and the safe harbor contribution) or if it is more

generous, is it permissible to make the change mid year?.

Examples:

• add a profit sharing feature

• change allocation conditions for the profit sharing formula to

eliminate last day requirement

• eliminate permitted disparity from a plan with a last day

requirement

• eliminate all distribution forms except for lump sum?

• liberalize eligibility requirements or entry dates?

IRS Announcement 2007-59 provides guidance only for mid-year changes to add a

Roth deferral feature or hardship withdrawals. Comment was requested on whether

additional guidance was needed with respect to other mid-year changes. To date, no

further guidance has been issued.

#8 2009 Q and A

401(k) plan relies on 401(k)(12) safe harbor by providing the 3% nonelective

contribution. It also provides a match that is not a safe harbor match under

section 401(k)(12), but does meet the requirements for the ACP safe harbor

under section 401(m)(11).

The employer wants to suspend the match, but not the 3% nonelective

contribution.

Issue: Does the suspension of the match cause the plan to have to be

amended to be subject to the ACP test for that year, or does it cause the

plan to lose BOTH the ADP and ACP safe harbors.

Cannot make a mid-year change to any safe harbor except the ADP match or the safe harbor

QNEC, because of notice rules. Of course, a discretionary match may be modified.

#5 2010 Q and A

My client wants to change to a more liberal eligibility period under a safe harbor plan, where the

safe harbor contribution is a nonelective contribution. The employer doesn't want to wait until the

beginning of the next plan year. Would it be permissible to make the amendment effective during

the year, since it doesn't affect elective deferral decisions by currently eligible employees?

Would the answer be different if the safe harbor contribution were a matching contribution?

ASPPA answer. We did not provide an answer.

IRS response. Presently the only exceptions for changes during the year are those identified in Announcement 2007-

59. The IRS will discuss this issue further from the podium.

#39 2011 Q and A

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I pulled out my 2011 annual conference DVD. The SH mid-year amendment questions, 39 and 40 start at 1:18:20 on the clock.

The response to the first question about changing deferral eligiblity was

This is a conversation that we have on an annual basis. There is some particular guidance out there, there’s Announcement 2007-59 and some provisions in the 401(k)-3 Regulations that specifically talk about permissible mid-year changes. We did seek comments on additional mid-year changes, but at this point we are sticking with the guidance out there.

Ilene mentions something about her recollection being the only amendments are Roth and Hardship. I took that as a reference to the cited guidance on amendments.

The next question is another mid-year question. The response is

Again, we don’t currently have any plans to issue guidance, but I think it might be worth talking a little bit about the purpose – why we have an issue about mid-year changes to begin with, and one of the requirements for a safe harbor plan is to provide notice to participants ahead of the year in which the deferrals would be made, so that the participants are able to make a knowledgeable decision about how much to put in the plan and that’s based on the information that’s provided at that time. And so, we’ve had kind of on-going discussions about issues where maybe there’s a mid-year change contemplated that really doesn’t impact that. We don’t have any guidance on that yet, but the rule is there. We don’t have any guidance to change it, but I do understand the point and I think this is something we should continue the conversation and see where we can go with that.

Now I'm being told the IRS said last week that the ONLY mid-year amendments allowed to safe harbor plans are adding Roth and expanding hardships to funeral expenses. I see changing from saying we are sticking with the published guidance to saying no amendments other than those addressed in Annoucement 207-59 are allowed is a "major" change.

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