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Mid Year Addition of Yr of Service for SH Match


kshawbenefits

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Client has a safe harbor plan that currently states that employee is eligible for safe harbor match as of the entry date following completion of first hour of service. Under Section III.D.2. of Notice 2016-16, can you amend the plan PROSPECTIVELY mid-year to require NEW employees to complete a year of service before becoming eligible for the safe harbor match? I believe that the guidance allows it, but I am curious as to whether anyone has done this. 

If yes, does client need to provide a new safe notice to existing participants? 

Thanks!

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Just thinking off the top of my head, I think this would narrow the class of employees eligible for the safe harbor and therefore is not allowed mid-year.  I know the notice mentioned some exceptions, and I can't recall them, but I don't think eligibility is one of them.  I think it was entry dates and something else.   

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it is already mid July. are there going to be that many new hires in the next 5 months that you can't wait until then to make the change? especially with a match, since that means only new hires who defer would receive. you are not 'eliminating' anyone who is currently eligible (thus narrowing the group which I what the example illustrate as impermissible), the restriction is only on new hires so I 'm not sure that is really narrowing the class (but I could be wrong), but unless you are talking about a large number of new hires I'm not sure if it worth the trouble this late in the year

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I haven't done that, but I read the section you cited the same way you do, as saying a mid-year prospective change to the eligibility service crediting or entry date provisions is allowed, provided it doesn't violate any other rules. 

Quote

2. A mid-year change to reduce the number or otherwise narrow the group of employees eligible to receive safe harbor contributions. This prohibition does not apply to an otherwise permissible change under eligibility service crediting rules or entry date rules made with respect to employees who are not already eligible (as of the date the change is either made effective or is adopted) to receive safe harbor contributions under the plan.

Did you see Example 7? It also gives guidance on the SH notice with a mid-year change similar to your situation.

Quote

Example 7: The employer sponsoring Plan S, a safe harbor plan, makes a mid-year amendment to change the entry date for commencement of participation of employees who meet the plan’s minimum age and service eligibility requirements from monthly to quarterly. The amendment also changes plan rules regarding arbitration of disputes. The amendment is effective with respect to employees who are not already eligible to participate in the safe harbor plan. The safe harbor notice is not required to include the plan entry date or information on arbitration procedures; therefore, an updated notice and additional election opportunity are not required. The mid-year change does not violate the provisions of §§ 1.401(k)-3 and 1.401(m)-3.

 

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14 hours ago, ERISAAPPLE said:

Just thinking off the top of my head, I think this would narrow the class of employees eligible for the safe harbor and therefore is not allowed mid-year.  I know the notice mentioned some exceptions, and I can't recall them, but I don't think eligibility is one of them.  I think it was entry dates and something else.   

I guess the question is whether the IRS is referring to narrowing the class/number of employees who are currently eligible vs. those who may be eligible in the future. If it is the former, then I agree you could not amend the plan to add the year of service requirement. But, if it is the latter, then I think we can add it prospectively for new hires. 

 

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1 hour ago, Kevin C said:

I haven't done that, but I read the section you cited the same way you do, as saying a mid-year prospective change to the eligibility service crediting or entry date provisions is allowed, provided it doesn't violate any other rules. 

Did you see Example 7? It also gives guidance on the SH notice with a mid-year change similar to your situation.

 

Thanks. I saw that example. My concern is that the example refers to entry dates specifically. Even though the amendment in Example 7 would make an employee wait longer to get into the plan by reducing the number of entry dates, it is not the same as adding a year of service requirement....

 

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4 hours ago, Tom Poje said:

it is already mid July. are there going to be that many new hires in the next 5 months that you can't wait until then to make the change? especially with a match, since that means only new hires who defer would receive. you are not 'eliminating' anyone who is currently eligible (thus narrowing the group which I what the example illustrate as impermissible), the restriction is only on new hires so I 'm not sure that is really narrowing the class (but I could be wrong), but unless you are talking about a large number of new hires I'm not sure if it worth the trouble this late in the year

Agreed- I would prefer that the client wait but we are looking at all options.

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On ‎7‎/‎18‎/‎2018 at 9:10 AM, Kevin C said:

I haven't done that, but I read the section you cited the same way you do, as saying a mid-year prospective change to the eligibility service crediting or entry date provisions is allowed, provided it doesn't violate any other rules. 

Kevin C, do you read eligibility service crediting rules to mean eligibility requirements?  I look at that language to mean a change, for example, from hours of service to elapsed time, or perhaps changing from actual hours to equivalencies.  

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8 hours ago, ERISAAPPLE said:

Kevin C, do you read eligibility service crediting rules to mean eligibility requirements?  I look at that language to mean a change, for example, from hours of service to elapsed time, or perhaps changing from actual hours to equivalencies.  

The more I look at the issue the more that I think that it is referring to crediting and not eligibility.

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Here is what  the FIS/Relius Technical Update says:

Link here: http://www.relius.net/news/TechnicalUpdateDetails.aspx?T=P&1=1&ID=1087

Prohibited mid-year changes and special rules
 

The Notice provides that a few mid-year changes are not permitted:
 

·         A change from a traditional safe harbor to a QACA, or vice versa; however the addition of an automatic enrollment feature to a traditional safe harbor plan is permitted;

·         A change lengthening the vesting schedule for QACA safe harbor contributions; or

·         A change reducing the number or otherwise narrowing group of employees eligible to receive safe harbor contributions. However, this does not limit the ability of the employer to amend a plan mid-year to change eligibility requirements for employees who have not yet become eligible to receive safe harbor contributions.

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I read it as referring to a change in eligibility requirements.  To me, the phrase "eligibility service crediting rules" includes what must be done to be credited with enough service to enter the plan, when the employee receives credit for that service and the entry date.  For example, a plan can provide that an employee is credited with a year of eligibility service as of the last day of the 12 month eligibility computation period in which he/she is credited with 1,000 hours of service, with semi-annual entry.  I think most of us would just call it "eligibility requirements".

 

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  • 4 weeks later...

Well first I should say that I am only a newbie, an aspiring QKA, so I wouldn't put much credibility on my thoughts or interpretations.  I am a bit biased though because I read the Relius technical update before reading the IRS notice, so my interpretation is influenced by the Relius materials. 

I only included it to facilitate further discussion on the topic. I would assume, and you know what they say about assumption in Under Siege II,  that the crew at Relius would have vetted their interpretation with their ERISA counsel/staff attorneys before broadcasting it for end users. Maybe someone on Benefits Link went to the Orlando Advanced Pension Conference in Feb 2016 and heard the presentation by Craig Hoffman on this topic and can chime in with the notes from the presentation. 

 

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you can't change the status of someone already eligible, but if someone hasn't met those requirements you can change. this is from the IRS website

https://www.irs.gov/retirement-plans/mid-year-changes-to-safe-harbor-401k-plans-and-notices

Examples of permissible mid-year changes

If they satisfy the notice rules, if applicable, safe harbor 401(k) plans sponsors may mid-year:

  1. Increase future safe harbor non-elective contributions from 3% to 4% for all eligible employees.
  2. Add an age 59 ½ in-service withdrawal feature.
  3. Change the plan’s default investment fund.
  4. Alter the plan rules on arbitration of disputes.
  5. Shift the plan entry date for employees who meet the plan’s minimum age and service eligibility requirements from monthly to quarterly.
  6. Adopt mid-year amendments required by applicable law (for example, statutory law changes or court decisions).

Examples of impermissible mid-year changes

Safe harbor 401(k) plan sponsors generally can’t mid-year:

  1. Increase an employee’s required number of completed years of service to have a nonforfeitable right to the employee’s account balance attributable to safe harbor contributions under a qualified automatic contribution arrangement (QACA).
  2. Reduce the number (or otherwise narrow) the group of employees eligible to receive safe harbor contributions. This prohibition doesn’t apply to an otherwise permissible change under either eligibility service crediting or entry date rules made for employees who aren’t already eligible (as of either the effective or adopted date of the change) to receive safe harbor contributions under the plan
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