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Safe harbor non-elective not yet made


thepensionmaven

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We recently took over a safe harbor non-elective plan.

Accountant called to tell me client did not make their 2015 or 2016 safe harbor contribution because "no one told them how much to contribute."

Then asks if the plan is "out of compliance".

As far as I know, as long as the SH contribution for both years is actually made, and ASAP, there is no issue?

 

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39 minutes ago, thepensionmaven said:

We recently took over a safe harbor non-elective plan.

Accountant called to tell me client did not make their 2015 or 2016 safe harbor contribution because "no one told them how much to contribute."

Then asks if the plan is "out of compliance".

As far as I know, as long as the SH contribution for both years is actually made, and ASAP, there is no issue?

 

I disagree with the conclusion that there is no issue as long as the contribution is made.

You have two primary issues here.  1) deductions 2) deposits

1) In order to be deducted for a particular year, the contribution has to be made by the due date of the employers tax return.  While they could be fine for 2016 if the corporate return was extended (assuming a calendar year plan), they certainly have an issue with the 2015 deduction since  they haven't made the 2015 contribution.

2) On the deposit side, you have an operational failure.  SH contributions must be made no later than 12 months after the close of the plan year.  Setting aside the deduction issue discussed above, you would be fine for 2016 but 2015 was due no later than 12/31/16 if this is a calendar year plan.  The primary correction method here would be to make the participants whole (credit lost earnings on the late contribution).  You may be able to self correct.

 

 

 

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2 hours ago, RatherBeGolfing said:

SH contributions must be made no later than 12 months after the close of the plan year.  Setting aside the deduction issue discussed above, you would be fine for 2016 but 2015 was due no later than 12/31/16 if this is a calendar year plan.  The primary correction method here would be to make the participants whole (credit lost earnings on the late contribution).  You may be able to self correct.

 

I agree that Maven's approach didn't seem to go far enough with respect to missing the 12 month deposit.  But I'm trying to get to your conclusion.  It would seem as if you'd lose the safe harbor by missing the 12 month deadline as well.  Shouldn't there be a method of 1) you must make the deposits because it was promised and 2) you lose your safe harbor status for that year for failure to meet the 12 month deposit deadline.

I'm asking.  It would be nice if it were as simple as making the deposit (with earnings), but it would appear as if relief under VCP would be necessary in order to forego testing for that year.

Again, I'm asking..

CPC, QPA, QKA, TGPC, ERPA

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the plan has an operational failure, and the penalty is possible disqualification.

one of the points of EPCRS is to prevent disqualification, so the solution is to fix the problem as if the error hadn't occurred, in this case, to make the missed contribution (adjusted for earnings). there is nothing to suggest or imply "and if it involves a safe harbor contribution, you also lose safe harbor status and have to run an ADP test if you are late"

the question, can you correct under SCP?

are there practices in place that normally prevent this from happening? ugh, how do you get around "well we know we have to make a contribution, but no one told us how much, even though it is well over a year past the deadline"

is the failure insignificant? well, 100% of the participants are affected, etc...probably not insignificant

if significant - it appears you could still correct without going to VCP.

.02 Correction period. (1) End of correction period. The last day of the correction period for an Operational Failure is the last day of the second plan year following the plan year for which the failure occurred. However, in the case of a failure to satisfy the requirements of § 401(k)(3), 401(m)(2), or, for plan years beginning on or before December 31, 2001, the multiple use test of § 401(m)(9), the correction period does not end until the last day of the second plan year following the plan year that includes the last day of the additional period for correction permitted under § 401(k)(8) or 401(m)(6).

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1 hour ago, Tom Poje said:

the plan has an operational failure, and the penalty is possible disqualification.

one of the points of EPCRS is to prevent disqualification, so the solution is to fix the problem as if the error hadn't occurred, in this case, to make the missed contribution (adjusted for earnings). there is nothing to suggest or imply "and if it involves a safe harbor contribution, you also lose safe harbor status and have to run an ADP test if you are late"

the question, can you correct under SCP?

are there practices in place that normally prevent this from happening? ugh, how do you get around "well we know we have to make a contribution, but no one told us how much, even though it is well over a year past the deadline"

is the failure insignificant? well, 100% of the participants are affected, etc...probably not insignificant.

I probably shouldn't have included the self correction part of my answer even with my  may qualifier.  Self correction can be available in cases of late SH contributions.  In this particular case, I would agree with Tom that it is probably not insignificant and therefore VCP would be the way to correct.

11 hours ago, ETA Consulting LLC said:

I'm asking.  It would be nice if it were as simple as making the deposit (with earnings), but it would appear as if relief under VCP would be necessary in order to forego testing for that year.

A correction has to be made.  Whether corrected under SCP or VCP, safe harbor status is protected and no testing would apply for that year.  For this particular case, I agree that VCP is probably necessary. 

 

 

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7 minutes ago, thepensionmaven said:

Suppose we ran the ADP and the tests passed; I assume the 3% would be construed as a profit sharing contribution???

No.  Per the document, you have committed to making a SH contribution in lieu of ADP testing.  Not making the SH contribution is an operational failure.

 

 

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4 hours ago, RatherBeGolfing said:

A correction has to be made.  Whether corrected under SCP or VCP, safe harbor status is protected and no testing would apply for that year.  For this particular case, I agree that VCP is probably necessary. 

I don't disagree with you.  I'm merely pointing out that safe harbor 401(k) has two distinct conditions that must be met: 1) Safe Harbor Contribution must be made; and 2) it must be deposited within 12 months after the 'safe harbor' year.

So, we agree that the the obvious operational failure in not making a contribution that was promised under the terms of the plan.  I'm still a little hung up on point (2), because the rules seem to suggest safe harbor is contingent on that as well.  In other words, making the contribution 'late' satisfies failure "1", but doesn't seem to address failure "2".

At the end of the day, I think we agree that VCP is necessary in light of these this issue.  Just being super-technical (which often avoids pragmatism), there seems to be an additional issue behind the 12 month deadline.  I would love to say "just make the 'fn' deposit and move on already", but that would create a little discomfort.  I think we agree for the most part.

Good Luck!

PS:  Here is a line directly from the DGEM BPD (that I use).  The wording seems to imply the 12 month deposit to qualify as Safe Harbor.  Hence, failure to make in 12 months mean you're not Safe Harbor:
The Safe Harbor Contribution must be made to the Plan no later than 12 months following the close of the Plan Year for which it is being used to qualify the Plan as a Safe Harbor 401(k) Plan.
 

CPC, QPA, QKA, TGPC, ERPA

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while the Q and A sessions don't necessarily reflect an actual Treasury position the following was suggested at the 2004 ASPPA Conference

While not quite the same situation it follows similar logic. They failed to issue notice timely. therefore they failed what is required for safe harbor, so while they still have to make the contribution they should test. the IRS disagreed.

16. Assume a calendar year safe harbor 401(k) plan with a 3%

nonelective contribution. The 3% safe harbor contribution is “hard

wired” into the plan document. For the year beginning 1/1/2004, no

safe harbor notice is given to the plan participants by the required

date. Is the result of no notice being given that (a) the plan must

perform 401(k) testing for 2004 and (b) the plan sponsor must still

contribute 3% for everyone?

A: No; You have an operational defect which should be corrected

under EPCRS. This will be additionally discussed from the podium.

 

 

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2 hours ago, ETA Consulting LLC said:

At the end of the day, I think we agree that VCP is necessary in light of these this issue.  Just being super-technical (which often avoids pragmatism), there seems to be an additional issue behind the 12 month deadline.  I would love to say "just make the 'fn' deposit and move on already", but that would create a little discomfort.  I think we agree for the most part.

Good Luck!

PS:  Here is a line directly from the DGEM BPD (that I use).  The wording seems to imply the 12 month deposit to qualify as Safe Harbor.  Hence, failure to make in 12 months mean you're not Safe Harbor:
The Safe Harbor Contribution must be made to the Plan no later than 12 months following the close of the Plan Year for which it is being used to qualify the Plan as a Safe Harbor 401(k) Plan.
 

I think we are actually saying the same thing, but the order in which things occur is the key (I think)

1.  Plan has an operational failure when the SH contribution is not deposited within the 12 month deadline.

2. Uncorrected, the plan loses SH status for the year in question.  But we don't have the option of not correcting, so we go to step 3.

3. Failure is corrected through EPCRS.  Plan no longer has an operational failure and plan keeps the SH status for the year in question.

So uncorrected you have a loss of SH status, but since you have to correct the failure, you end up with the SH status protected.  

 

 

 

 

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tripped across this while looking something else

 

ERISA Outline Book, Chapter 11 Section XIV Part B   2012 edition

7(c) Consequences of failing to make a timely contribution...

since...safe harbor...must be set forth in the plan....operational failure...

primary correction....place participants in same position as if deposit had been made timely...include lost earnings....EPCRS would apply here...safe harbor status would be protected. Late contributions would not require the plan to default back to ADP/ACP testing.

 

This paragraph was not in the 2008 edition, Big Sal must of thought it important enough to add to the book, but then, for all I know maybe he pulled it back out and it is no longer in later editions.:D

 

..............

 

 

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8 minutes ago, Tom Poje said:

tripped across this while looking something else

 

ERISA Outline Book, Chapter 11 Section XIV Part B   2012 edition

7(c) Consequences of failing to make a timely contribution...

since...safe harbor...must be set forth in the plan....operational failure...

primary correction....place participants in same position as if deposit had been made timely...include lost earnings....EPCRS would apply here...safe harbor status would be protected. Late contributions would not require the plan to default back to ADP/ACP testing.

 

This paragraph was not in the 2008 edition, Big Sal must of thought it important enough to add to the book, but then, for all I know maybe he pulled it back out and it is no longer in later editions.:D

 

..............

 

 

I use the 2017 online version and it is till there.

 

 

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Hmmm - how flattering to be called a youngster. However, the truth is that being an "oldster" my brains have turned to mush, and I just didn't pick up on the reference. Now all this talk of pasta sauce has made me hungry (for homemade sauce, not the stuff out of a jar...)

 

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did you mean 1 bottle for sauce, another bottle to get sauced?

I did a search, this is about the same as what I use

I have never used onion or oil. I use a small can on tomato paste thought their recipe called for 16oz. I use 50/50 Ricotta cheese and cottage cheese

I cut back on the ground beef and use 1/2lb or so hot Italian  sausage

I use no bake noodles. I butter the baking dish beforehand.

Lasagna Belmonte

 

 

Ingredients:  

1 med. onion, chopped
3 T. olive oil or salad oil
1 1/2 lbs. lean ground beef
1 clove garlic, minced or mashed
16 oz. tomato sauce
16 oz. tomato paste
1/2 c. dry red wine
1/2 c. water
1 tsp. salt
1 tsp. oregano
1/2 tsp. pepper
1/2 tsp. sugar
12 oz. lasagna noodles
2 c. ricotta cheese
1/2 lb. mozzarella cheese, shredded
 Parmesan cheese, shredded


Directions:

Directions:

In a large frying pan that has a cover, saute onion in oil until soft; add beef and garlic; cook, stirring until meat is brown and crumbly. Stir in tomato sauce, tomato paste, wine and water. (You may use 1 cup of water instead of 1/2 cup each of wine and water). Add salt, oregano, pepper and sugar; stirring until mixed. Cover pan and simmer slowly about 1 1/2 hours.

Meanwhile, cook noodles in boiling salted water as directed on the package, until tender; about 15 minutes. Drain thoroughly, rinse with cold water and drain again. Arrange about 1/3 of the noodles in the bottom of a 9x13 inch shallow casserole dish, crisscrossing noodles. Spread 1/3 of the meat sauce over the noodles; top with 1/3 of the ricotta (you may use small curd cottage cheese) and mozzarella cheese. Repeat this layering two more times. Top with Parmesan cheese.

Bake uncovered at 350º for 40-50 minutes. Remove form oven and serve.

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  • david rigby changed the title to Safe harbor non-elective not yet made

Lasagna al Poje. Sounds good! Pretty similar to what I use, but I always use onion, oil, more garlic, all ricotta, and FRESH chopped parsley - really brightens up the flavor. Also prefer the regular noodles - purist (or maybe snob) that I am. I love the hot Italian sausage (although I usually have to use sweet, or just hamburger, because most of my family doesn't like spicy stuff - strange people). The thing is, it is pretty hard to go wrong - I've rarely had bad lasagna. I assume you make it with love...

Maybe you can e-mail me a tray of it. Virtual meals are probably better for me anyway.

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Unless you are making your own tomato sauce, most jarred brands have enough sugar in them already.

 

(This was quite the departure from SH contrib timing!)

QKA, QPA, CPC, ERPA

Two wrongs don't make a right, but three rights make a left.

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  • 10 months later...

Restarting this convo about failing to make a safe harbor contribution by the deadline (as opposed to the one about lasagna and tomato sauce)...can someone explain to me why SCP is not an option and VCP would be necessary?  Is that specific to this original example?

I have two takeovers clients (not related) who did not make their 2016 safe harbor contributions yet.  Neither has a good reason.  In addition to making the required safe harbor deposits as soon as possible and adjusting for lost earnings, do we need a VCP submission or can we self-correct?

 

Thanks!

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