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Amend SH 401(k) Plan During Year


JRN
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Employer would like to amend its safe harbor 401(k) plan to allow for in-service withdrawals from the Plan of non-safe harbor funds, i.e., profit sharing and employer matching contributions. (The safe harbor contibution is 3% non-elective.) Seems to me that this type of amendment should be permitted, reasoning that because it does not affect any of the Plan's safe harbor provisions the proposed amendment does not run afoul of Treas. Reg. 1.401(k)-1(e)(3). But, general thinking seems to be that this type of amendment is not permitted during the plan year -- only at the beginning of the plan year.

Thoughts? Thanks.

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at every ASPPA meeting IRS officials have pretty much stuck to their guns and said you can only amend to add a Roth feature or add (I think) funeral provisions to in-service withdrawals. (And I always had the feeling they were saying their hands were tied, whether they agreed or disagreed)

Its only 3 more months if its a calendar year plan...

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Here we go again.

ASPPA conferences are recorded. For at least the last few years, those recordings are mailed to each attendee. I have attended the ASPPA annual conference, including the DC Q&A sessions, for more years than I care to mention and have never heard an IRS representative say that the only mid-year amendments allowed for a SH plan are the two situations referenced in Announcement 2007-59 (Roth and modifying hardships). Recently, I pulled out my conference DVD from 2011 and typed up the IRS comments on the questions where some claimed this was said. Since the IRS has supposedly said this repeatedly, I challenge someone to provide either a transcript or a written Q&A response from a session where the IRS actually said what is claimed.

Here is a copy of my prior post with the transcript of the IRS statements at the 2011 ASPPA annual conference:

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 2007-59 are allowed is a "major" change.

<end of prior post>

And, here is the text from Announcement 2007-59:

Announcement 2007-59

The Internal Revenue Service has learned that some employers have concerns about adding provisions during a plan year to their §401(k) safe harbor plans (described in §401(k)(12) of the Internal Revenue Code) in order to take advantage of recently effective changes to the rules for §401(k) plans, such as a qualified Roth contribution program (as defined in §402A) or hardship withdrawals described in part III of Notice 2007-7, 2007-5 I.R.B. 395, when the pre-year safe harbor notice required by §401(k)(12)(D) does not include information about the added provisions.

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)). Written comments should be submitted by September 17, 2007. Send submissions to CC:PA:LPD:DRU ( Announcement 2007-59), Room 5203, Internal Revenue Service, POB 7604 Ben Franklin Station, Washington, D.C. 20044. Comments may be hand delivered to CC:PA:LPD:DRU ( Announcement 2007-59), Room 5203, Internal Revenue Service, 1111 Constitution Avenue, NW., Washington, DC. Alternatively, comments may be submitted via the Internet at notice.comments@irscounsel.treas.gov ( Announcement 2007-59). All comments will be available for public inspection.

Nothing in the Announcement says these are the only changes that can be made. It says that these two particular mid-year changes are OK. Many have asked for additional guidance. The IRS has consistently said at the conferences I've attended that they will not be issuing additional guidance.

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Guest GeerTom

And absent a change in the statute or regulations, guidance that would prevent the suggested amendment would be wrong.

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With respect to what KevinC has documented, I would think a reasonable approach would be to determine if such amendment would contradict anything provided in the notice issued prior to the plan year (or if the next notice would change as a result of this amendment). If nothing would change in the notice that was provided, then it should be safe to create the amendment.

Good Luck!

CPC, QPA, QKA, TGPC, ERPA

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I think I'd be even more aggressive than ERISAtoolkit - for example, suppose the plan had 6-year graded vesting for employer PS contributions, and the SH notice naturally shows this. If the employer decides, mid-year, to change vesting to 100% immediate, I'd say that is fine. Is an IRS auditor seriously going to object to this amendment, which in NO WAY affects the 3% nonelective safe harbor provisions?

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With respect to what KevinC has documented, I would think a reasonable approach would be to determine if such amendment would contradict anything provided in the notice issued prior to the plan year (or if the next notice would change as a result of this amendment). If nothing would change in the notice that was provided, then it should be safe to create the amendment.

Good Luck!

Sorry, but I'm still in rant mode. That really isn't much different than taking the approach of no amendments allowed mid-year. There is a lengthy list of provisions that must be described in the SH notice. But a provision being described in the notice is not the same as being a provision which satisfies the rules of 1.401(k)-3 or 1.401(m)-3. The Employer name, address and phone number are required to be listed in the SH notice. To me, it's absurd to say that they are not allowed to amend the plan mid-year to reflect a change in the Employer's address or phone number. The published guidance is strict enough. I don't understand why some in this industry insist on twisting it around to make it much worse.

Here is the mid-year restriction from the regs. There is no mention of provisions required to be described in the SH notice.

1.401(k)-3(e)Plan year requirement

(1)General rule.— 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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The Employer name, address and phone number are required to be listed in the SH notice. To me, it's absurd to say that they are not allowed to amend the plan mid-year to reflect a change in the Employer's address or phone number. The published guidance is strict enough. I don't understand why some in this industry insist on twisting it around to make it much worse.

I agree, but my comments were intended to structure an approach to answering the question as opposed to suggest something as minor as changing the sponsor's name would constitute a significant change. I was thinking along the terms of amending the plan to add an additional matching contribution when the plan (nor the notice) made no mention of a match.

Here is the mid-year restriction from the regs. There is no mention of provisions required to be described in the SH notice.
I agree, it was more of an idealistic approach to add reason. Just think of how "MOST" operational items could be amended to provide for things that are contrary to what we mentioned in the safe harbor notice. Some items may "clearly" be amended during the year while other would straddle the line. My approach was merely to help distinguish "some" clear cut items as opposed to providing a definitive answer.
1.401(k)-3(e)Plan year requirement

(1)General rule.— 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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CPC, QPA, QKA, TGPC, ERPA

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I think I'd be even more aggressive than ERISAtoolkit - for example, suppose the plan had 6-year graded vesting for employer PS contributions, and the SH notice naturally shows this. If the employer decides, mid-year, to change vesting to 100% immediate, I'd say that is fine. Is an IRS auditor seriously going to object to this amendment, which in NO WAY affects the 3% nonelective safe harbor provisions?

"Like". Even though I wouldn't agree because of the aforementioned reasons :)

This goes to show that even though we agree on many issues, we often disagree.

In my mind, this is when it becomes imperative that the IRS offers more specific guidance. It could be argued that if plan that uses a 3% nonelective, and guarantees a fixed match on top of that would have compelled someone to defer earlier in the year if the individual realized the matching contribution would be 100% vested as opposed to a 6 year graded. Even though everyone is better off in all instances, a time-frame for becoming 100% vested "may" impact the individual's willingness to defer. It's just an argument. At the end of the day, I couldn't imagine an auditor challenging it (so I sort of agree). :huh:

CPC, QPA, QKA, TGPC, ERPA

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But, we have very specific guidance already, in the regs. I copied it in a post above. Do you see a requirement in 1.401(k)-3 or 1.401(m)-3 that is satisfied by the PS contribution vesting provisions?

Personally, I think the restrictions in the regulations are too broad. But I still have to admire what they came up with. It's a simple, clear and effective solution to a difficult issue. That's a rare thing in regulations.

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  • 5 months later...

Does anyone have any thoughts on amending a safe harbor plan (3% non-elective) mid-year to exclude from eligibility a class of employees. These employees would be spun off into a new plan (No. 002) that mirrors the old plan (No. 001), is on the same administrative platform, same investments, etc.

There are business reasons for the spin-off. The employees in plan No. 002 are receiving a substantial pay increase but are still NHCE's (barely). Employees in the old plan will receive a additional profit sharing contributions that are substantial and are needed for gateway requirements. There is no other way to pass gateway contribution requirements for this group without using two plans.

Seems to me that the NHCEs will be getting exactly what they were promised, albeit through a Plan No. 002 rather than 001. No one is actually losing eligibility. So, to the point of avoiding amendments that change the rules of the game for participants, this one doesn't and I would hope is ok. Feedback appreciated.

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There isn't any guidance I'm aware of for spin-offs from SH plans. As for mid-year amendments to SH plans in general, there are widely varying opinions.

A couple of other issues to consider.

1. The amendment to plan 001 could be interpreted as a suspension of the SH contribution in that plan for the affected participants. It doesn't sound like they have a substantial business hardship.

2. Plan 002 would be a successor plan under 1.401(k)-2©(2)(iii), so you can forget about safe harbor for a short initial plan year.

My suggestion would be to take the gateway contributions they want to avoid giving to group 002 into consideration when they determine those substantial pay increases and make the plan changes effective next year.

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No business hardship at all. Our client simply delayed making the decision until now but still wants the same outcome ... no problem, right? Good point on the successor plan rule, although Plan 002 would only have NHCEs. This is another one of those frustrating areas where you seem to need two plans to achieve a legal result. It seems that if it can be done in two plans, it should be permissible in one plan.

Thank you for the feedback. I've not seen any guidance for spin-offs, either, although there is a carve out for 410(b)(6) in a transaction. The safe harbor regs specifically permit making the contribution to a separate plan. I don't think this scheme violates the intent of the regulations. Maybe I can get a response from the National Office.

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