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Purplemandinga

Retroactive Safe Harbor Amendment

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Lets say a sponsor half way through a plan year wishes to retroactively amend the plan document back to the first day of the plan year a Safe Harbor Match plan. Specifically, they wish to amend the plan to change the eligibility requirements for safe harbor contributions and deferrals to go from 1 year 1000 hours to immediate entry. If they make this amendment, will they have to make up contributions for employees who did not defer but may have decided to defer had they had the opportunity to do so plus the safe harbor allocation?

I want to say I should look at EPCRS which suggests if I inadvertently didn't allow someone to contribute then I should make an allocation to that individual based on the ADP/ACP group that individual falls in. But also I could just be over thinking it. Thoughts?

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Is this a calendar year plan?

Option 1 - that you seem to be proposing?

I'm not sure I think there is a missed opportunity to defer - but let's assume there is - 

Rev Proc 2019-19 provides that no QNEC for a MOD is required for the deferral portion if the missed period is less than 3 months. So as long as folks are notified of the update and have the opportunity to change their deferral election for any paydates on or after 4/1, I think that is fine. There may be some SH match due if they participants don't max out the match on their own, but I don't think that's the case either. Mainly because I don't see this as a missed opportunity to defer. 

Option 2 - which I think is more likely, and how I would approach it

The IRS has provided explanations about mid-year changes to safe harbor provisions. And they are generally allowed for match if there are at least 3 months left in the year (check), is retroactive to the beginning of the year (check), and increases the benefit (I would say an increase in who is eligible / decrease in eligibility conditions is an increase in benefit), and have an opportunity to change their deferral election.  There is no mention in the IRS guidance about making sure participants are made whole because of some missed opportunity to defer. Likely because if there are several months left in the year they (in theory at least) have the ability to adjust their deferrals and receive the increased match. 

I'm sure others can delve into this more deeply or maybe chime in if there is some nuanced rule that applies to change the analysis, but Option 2 is how I would analyze it and treat it. 

 

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Hmm, that's where I'm struggling, in determining whether a MOD exists. It is a calendar year plan.

There are definitely 3 months left in the year, but if we retroact back to 1/1 then is it arguable that we missed deferrals for 6 months? I know that the rules for midyear changes allow for safe harbor notices to go out mid year for similar changes. However, I keep thinking this situation is similar to the correction for when a safe harbor notice was not timely provided to participants. Lets say someone was allowed to defer on 1/1 but didn't get the SH notice till mid year. Then you have to make an educated guess as to who would have chosen to defer and make corrective allocations to those employees.

Your option 2 sounds reasonable though.

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1 hour ago, Purplemandinga said:

Hmm, that's where I'm struggling, in determining whether a MOD exists. It is a calendar year plan.

There are definitely 3 months left in the year, but if we retroact back to 1/1 then is it arguable that we missed deferrals for 6 months? I know that the rules for midyear changes allow for safe harbor notices to go out mid year for similar changes. However, I keep thinking this situation is similar to the correction for when a safe harbor notice was not timely provided to participants. Lets say someone was allowed to defer on 1/1 but didn't get the SH notice till mid year. Then you have to make an educated guess as to who would have chosen to defer and make corrective allocations to those employees.

Your option 2 sounds reasonable though.

I am quite sure it is not a missed opportunity, and would treat it as such, unless they ever say otherwise.  FWIW.

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Its a discretionary change mid year to retroactively (to the beginning of that year) make eligibility more liberal. Its not an EPCRS amendment, its just an allowed mid year SH change that is retroactive to 1/1.

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Something has been bugging me about this but I wasn't paying close attention.  I don't think it is a missed deferral opportunity - in fact absolutely not - and I think IRS Notice 2016-16; C-1 (my bold) is specific to your situation and says it is ok.  I looked at the cross-referenced part and it seems confirm, but I suggest you pick the notice apart word for word to make sure.


1. An updated safe harbor notice that describes the mid-year change and its
effective date must be provided to each employee otherwise required to be provided a
safe harbor notice under § 1.401(k)-3(d), 1.401(k)-3(k)(4), or 1.401(m)-3(e), as
applicable, within a reasonable period before the effective date of the change. Whether
this timing requirement is met is based on all of the relevant facts and circumstances,
but this timing requirement is deemed to be satisfied if the updated safe harbor notice is
provided at least 30 days (and not more than 90 days) before the effective date of the
change. If it is not practicable for the updated safe harbor notice to be provided before
the effective date of the change (for example, in the case of a mid-year change to
increase matching contributions retroactively for the entire plan year, as described in
section III.D.4 of this notice), the notice is treated as provided timely if it is provided as
soon as practicable, but not later than 30 days after the date the change is adopted.

For purposes of this section III.C, if the required information about the mid-year change
and its effective date was provided with the pre-plan year annual safe harbor notice, an
updated safe harbor notice is not required.

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Bird, I think the bolded section applies when the employer is increasing the match formula, for example changing from a basic SH match to an enhanced match. What Purplemandinga is talking about is making additional employees eligible retroactively.

I am curious what the employer is trying to achieve with this. Why not just make the participants eligible on the effective date instead of messing around with retroactive entry?

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3 hours ago, C. B. Zeller said:

Bird, I think the bolded section applies when the employer is increasing the match formula, for example changing from a basic SH match to an enhanced match. What Purplemandinga is talking about is making additional employees eligible retroactively.

I am curious what the employer is trying to achieve with this. Why not just make the participants eligible on the effective date instead of messing around with retroactive entry?

Understood but I think it still fits.

As to your second point, I agree.

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It looks like everyone is reading the OP as saying the plan included the SH match at 1/1/20 and the only thing to be amended is the eligibility requirements. If that's not the case, it's a different answer.

I can only think of two situations where it makes any sense to retroactively make someone eligible to defer.  One is if you are doing a corrective amendment because someone was improperly allowed to defer too early.  The other is to correct a failing 410(b) test.  I agree with the suggestion to make them eligible when the amendment is done, not retroactively.  If they want compensation for the entire year to be used to calculate the match, amend the plan to use compensation for the plan year including amounts prior to participation.

As for missed deferral opportunity, if the plan document says someone is eligible to defer 1/1/20 and they were not offered the opportunity to defer starting 1/1/20, there is a missed deferral opportunity. 

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One more thought on this, if you're talking about EPCRS then you're talking about qualification failures. You can't adopt an amendment that will intentionally cause a failure and then expect to be able to rely on SCP to fix it.

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