Discontinue safe harbor 3%

[rlb64]

Is it possible to amend a plan now to discontinue the safe harbor 3% non-elective for the calendar year 2009? In theory, a notice was handed out to participants on time, i.e., 12/1/08.

[Guest Sieve]

The safe answer is No--unless the notice was of the "maybe" kind, in which case the answer, obviously, is yes. But, I would suggest that you can revoke the SH notice if the plan year has not begun. No authority, just a gut feeling.

[K2retire]

Ordinarily revoking the SH requires 30 days advance notice. So unless the notice in the OP was a notice of discontinuance of the SH, it is too late to do it effective 1-1-09. Depending on how quickly it can be sent out, it could probably be discontinued some time in January.

[J Simmons]

k2retire,

Are you referring to the 30 day advance notice of the reduction or suspension of safe harbor matching contributions set forth in Treas Reg § 1.401(k)-3(g)(1)(ii)?

Is it your position that a reduction or suspension of safe harbor 3% contributions must follow those rules as well?

[K2retire]

That's what I've been told. Although I can't claim any personal research to verify that.

[Kevin C]

1.401(k)-3(g)(1)(ii) has the rules for amending a SH match plan during the plan year to reduce the match. The OP is not talking about an amendment made during the 2009 plan year.

I'm curious what the opinions would be for a couple of other scenarios:

1. The plan was amended 11/1/2008 to remove the SH. A 2009 SH notice is sent by mistake on 12/1. Are they SH for 2009 or not?

2. A safe harbor notice is not sent for 2009, but the plan contains SH provisions. Are they SH for 2009 or not?

[J Simmons]

I'm curious what the opinions would be for a couple of other scenarios:

1. The plan was amended 11/1/2008 to remove the SH. A 2009 SH notice is sent by mistake on 12/1. Are they SH for 2009 or not?

For purposes of avoiding ADP/ACP testing, no.

The inadvertent notice probably obligates the ER to make the contribution described in the notice.

2. A safe harbor notice is not sent for 2009, but the plan contains SH provisions. Are they SH for 2009 or not?

For purposes of avoiding ADP/ACP testing, no.

Depending on the wording of the plan's SH provisions, the ER may yet be obligated to make the SH contribution. As with some GUST II prototypes, some EGTRRA prototypes with 3/31/08 IRS opinion letters have the SH language that it only applies to a PY for which a proper SH notice is timely provided. So it appears that the IRS is yet okay with such SH language despite the final 401k regs.

[BG5150]

The inadvertent notice probably obligates the ER to make the contribution described in the notice.

Why would that be? The amendment (in this example) was done before the notice went out, so, in theory, the plan cannot be safe harbor for 2009. So how could an employer send out a notice saying it will make a contribution that is not allowed in the plan and be held to it?

What if I said to my employees I was going to make a matching contribution for 2009, but my plan does not allow for it. Would I still be on the hook for it?

[Kevin C]

I recall a question very close to my question 1 addressed at an ASPA annual conference IRS Q&A session several years ago. The question dealt with a SH notice being sent, but the plan was not amended to provide the SH. The answer was that the terms of the document control. I think that has to be the answer because the SH notice is not an amendment to the plan. If you question that, look at the amendment procedure in your plan document.

For my question 2, I cheated. Tom posted this a while back. http://www.irs.gov/retirement/article/0,,id=200386,00.html

This is the situation with Indigo in the article. Failure to provide the notice is a failure to follow the terms of the plan. The failure is corrected by providing the notice and revising the SH notice delivery procedures so the error won't happen again. The plan document language controls. We also had informal guidance on this a few years back.

Back to the OP, there isn't any official guidance on this. My opinion is that a reasonable interpretation of the regs and existing guidance allows you to remove the 2009 safe harbor as long as the amendment is adopted before the beginning of the 2009 plan year. If the 2009 notice was already sent, you have some explaining to do. But, to me that is an employee relations issue, not a plan one. Others will likely disagree. Don't you love it when there can be more than one reasonable interpretation of the rules?

[J Simmons]

The inadvertent notice probably obligates the ER to make the contribution described in the notice.

Why would that be? The amendment (in this example) was done before the notice went out, so, in theory, the plan cannot be safe harbor for 2009. So how could an employer send out a notice saying it will make a contribution that is not allowed in the plan and be held to it?

What if I said to my employees I was going to make a matching contribution for 2009, but my plan does not allow for it. Would I still be on the hook for it?

Separate and apart from the safe harbor from ADP testing (an IRS issue), you have the DoL side of ERISA where providing EEs what is promised them is a chief concern as well as EEs perhaps having contractual issues if the 3% promised in the notice is not in fact made. The notice promises employees a 3% of pay contribution not subject to vesting. If you cannot timely amend your plan to fit with your promise--and again, not talking here for purposes of qualifying for the safe harbor from ADP testing, but talking about fulfilling a promise to EEs--then you might have to fulfill the promise in some other way. That an ER inartfully failed to fit its plan into the safe harbor from ADP testing for a plan year does not vitiate the promise-to-EEs aspect unless the notice also provides that the promised contribution is conditioned upon the safe harbor otherwise applying.

[Kevin C]

I don't understand where you are going with this. Are you trying to say that the SH Notice supercedes the terms of the plan? Or, are you trying to say that the unsigned SH Notice is a contract between the employer and employees?

[Peanut Butter Man]

The plan document we use says that the safe harbor notice is an amendment to the plan, so for us the safe harbor notice does become part of the plan documentl.

[J Simmons]

I don't understand where you are going with this. * * * Or, are you trying to say that the unsigned SH Notice is a contract between the employer and employees?

Would you be saying the contrary? that an ER that gives its EEs a notice promising that the ER will contribute 3% of their pay may wiggle out of that promise just because the ER botched a tax angle (safe harboring against ADP) that was the motivation for the ER to give the notice?

[Kevin C]

What I'm saying is that the plan document must be followed. The safe harbor notices we prepare are not an amendment to the plan. Our documents do not say the SH notice is an amendment to the plan. If the plan document does not provide for a safe harbor contribution, then you would have an operational failure if you allocate a safe harbor contribution.

But, you didn't answer my question. Are you saying that a safe harbor notice, not signed by anyone, is a binding contract between the employer and employees?

[Kevin C]

The plan document we use says that the safe harbor notice is an amendment to the plan, so for us the safe harbor notice does become part of the plan documentl.

That's an interesting way to do it. It would be a challenging task to get enough detail in the notice for it to serve as an amendment and still have it be written in a manner calculated to be understood by the average participant.

[J Simmons]

What I'm saying is that the plan document must be followed. The safe harbor notices we prepare are not an amendment to the plan. Our documents do not say the SH notice is an amendment to the plan. If the plan document does not provide for a safe harbor contribution, then you would have an operational failure if you allocate a safe harbor contribution.

But, you didn't answer my question. Are you saying that a safe harbor notice, not signed by anyone, is a binding contract between the employer and employees?

What happens when an SPD is more generous than the underlying plan document? My answers are Socratic ones.

[Kevin C]

What happens when an SPD is more generous than the underlying plan document?

Wouldn't the answer to that vary depending on the exact circumstances and the judge(s) hearing the case?

When the summary of material modifications or updated SPD is timely provided following a December 2008 amendment to remove the SH at 1/1/2009, doesn't that ruin your SH Notice as SPD argument?

[J Simmons]

What happens when an SPD is more generous than the underlying plan document?

Wouldn't the answer to that vary depending on the exact circumstances and the judge(s) hearing the case?

When the summary of material modifications or updated SPD is timely provided following a December 2008 amendment to remove the SH at 1/1/2009, doesn't that ruin your SH Notice as SPD argument?

If you add the new facts ("summary of material modifications or updated SPD is timely provided following a December 2008 amendment" were not in your Post #6) after the erroneous SH notice, then I think you have a different situation. As Post #6 had it, I think the EEs (or DoL for them) would have a good claim against the ER.

[Kevin C]

Sorry, I was referring to the OP's situation, not my post #6. An amendment removing the SH would require either an SMM or an updated SPD, so I don't consider that adding new facts. The SPD wasn't under discussion until you brought it up.

If you concede that an SMM or SPD given after the erroneous SH notice changes things, your argument is a moot point. The deadline for an SMM is 210 days after the end of the plan year in which the change is adopted. That leaves plenty of time to change things.

Our electronic ping pong hasn't changed my mind. I still don't see how a SH notice by itself creates an obligation inside the plan when the plan document does not include SH provisions. Of course, that is assuming your document doesn't say the SH notice is an amendment to the document.

[J Simmons]

Sorry, I was referring to the OP's situation, not my post #6. An amendment removing the SH would require either an SMM or an updated SPD, so I don't consider that adding new facts. The SPD wasn't under discussion until you brought it up.

If you concede that an SMM or SPD given after the erroneous SH notice changes things, your argument is a moot point. The deadline for an SMM is 210 days after the end of the plan year in which the change is adopted. That leaves plenty of time to change things.

Our electronic ping pong hasn't changed my mind. I still don't see how a SH notice by itself creates an obligation inside the plan when the plan document does not include SH provisions. Of course, that is assuming your document doesn't say the SH notice is an amendment to the document.

[BTG]

Is it possible to amend a plan now to discontinue the safe harbor 3% non-elective for the calendar year 2009? In theory, a notice was handed out to participants on time, i.e., 12/1/08.

What if the safe harbor notice for 2008 was never provided? Kevin, I agree that the article you linked to in Post # 9 offers one solution. But does this preclude the employer's ability to amend the plan before the beginning of the 2009 plan year to eliminate the SHNEC?

[Kevin C]

What if the safe harbor notice for 2008 was never provided? Kevin, I agree that the article you linked to in Post # 9 offers one solution. But does this preclude the employer's ability to amend the plan before the beginning of the 2009 plan year to eliminate the SHNEC?

Do you mean what if the 2009 notice wasn't sent out? In my opinion, the notice or lack thereof, wouldn't make a difference IF the plan is amended before the beginning of the plan year. The contribution is required if the document says it is required. If you don't amend before the beginning of the plan year, then you have to follow the mid-year amendment rules.

But, as I said before, I think there is more than one reasonable interpretation of the rules in this case. If you want to follow the mid-year amendment rules even though the amendment is adopted before the beginning of the year, that is a reasonable interpretation, too.

John, Would it affect your answer if the 2009 notice had not been sent?

[J Simmons]

What if the safe harbor notice for 2008 was never provided? Kevin, I agree that the article you linked to in Post # 9 offers one solution. But does this preclude the employer's ability to amend the plan before the beginning of the 2009 plan year to eliminate the SHNEC?

Do you mean what if the 2009 notice wasn't sent out? In my opinion, the notice or lack thereof, wouldn't make a difference IF the plan is amended before the beginning of the plan year. The contribution is required if the document says it is required. If you don't amend before the beginning of the plan year, then you have to follow the mid-year amendment rules.

But, as I said before, I think there is more than one reasonable interpretation of the rules in this case. If you want to follow the mid-year amendment rules even though the amendment is adopted before the beginning of the year, that is a reasonable interpretation, too.

John, Would it affect your answer if the 2009 notice had not been sent?

Hi, Kevin,

Yes, it would change my answer. Just to make sure I'm tracking then the question, with no notice being sent, your #1 would read (bolding is where the changes are):

1. The plan was amended 11/1/2008 to remove the SH. No 2009 SH notice is sent. Are they SH for 2009 or not?

In this situation, 2009 would not be safe harbored from testing. The two requirements are not met: plan so provides and notice timely provided.

There would be no inadvertent notice by which the ER said to the EEs that the ER would make a contribution. So the EEs wanting to force the ER's hand would not be able to 'hang their hats on' any such promise.

My answer would be the same as in post #7 for your #2, as it has all along posited no notice being provided.

[BTG]

What if the safe harbor notice for 2008 was never provided? Kevin, I agree that the article you linked to in Post # 9 offers one solution. But does this preclude the employer's ability to amend the plan before the beginning of the 2009 plan year to eliminate the SHNEC?

Do you mean what if the 2009 notice wasn't sent out? In my opinion, the notice or lack thereof, wouldn't make a difference IF the plan is amended before the beginning of the plan year. The contribution is required if the document says it is required. If you don't amend before the beginning of the plan year, then you have to follow the mid-year amendment rules.

But, as I said before, I think there is more than one reasonable interpretation of the rules in this case. If you want to follow the mid-year amendment rules even though the amendment is adopted before the beginning of the year, that is a reasonable interpretation, too.

John, Would it affect your answer if the 2009 notice had not been sent?

Sorry, I should have been more clear in my original question. The plan provides for SHNEC. No SH notice was provided at the end of 2007 for the 2008 plan year. Prior to the end of 2008, the employer wants to amend the plan (effective 1/1/2008) to eliminate the safe harbor and go through the testing. I know that if a plan provides that it is a SH plan, the failure to provide the notice does not result in the plan simply defaulting to testing. But what if the plan is actually amended to eliminate the SH provisions? Arguably, it is then not a SH plan. Is that permissible, or is it just an unsuccessful attempt at avoiding the issue?

[Tom Poje]

lets ignore the fact the plan is safe harbor.

lets pretend it is a 3% money purchase.

your suggest would be that you amend the plan to 0% to get out of it. that is clearly a no-no.

or suppose the plan was a 2% DB. you are suggesting going beyond just freezing the plan, but eliminating something someone has accrued.

remember, in a safe harbor plan, there are no accrual requirements. so these folks have already accrued the safe harbor. it is to late to retroactively amend the plan back to 1/1/08.

[Kevin C]

BTG, Sorry, I thought you were asking about amending to remove the SH for 2009.

I agree with Tom that the anti-cutback rules of 411(d)(6) prevent you from retroactively amending to remove the SH. Then, you still have to deal with the SH rules regarding amendments during the year.