safe harbor 401k plan

[Oh so SIMPLE]

If a 401k plan specifies in its adoption agreement that it is safe harbored and the employer will make the match, but then did not give the annual safe harbor notice before the 2005 plan year began, is the matching contribution required for 2005?

The ADP/ACP tests would apply because there was no safe harbor notice.

But does the plan also have to make the safe harbor match specified in the adoption agreement?

Does the employer have to make a contribution equal to 50% of 3% (or actual ADP) and then the match to correct for 2005? The 50% employer contribution is what EPCRS currently calls for if the employee had no effective opportunity to make elective deferrals. Does not notifying employees of the safe harbor match deprive employees of an effective opportunity to make deferrals (or more deferrals) to then be entitled to the match? The employees nevertheless could make elective deferrals even without the safe harbor notice.

Revenue Procedure 2008-50 asks for comments about how EPCRS ought to be modified in the future to add a correction for such a failure. The IRS is auditing this particular situation and the agent asserting that 50% employer contribution by analogy and requiring it in addition to the safe harbor match in order to avoid disqualification of the plan.

What experience has anyone had with other IRS auditors dealing with this type of situation?

Thanks for any information or suggestions you make.

[Tom Poje]

if no notice was provided, the IRS has indicated that you have a possible disqualifying event - that is, you failed to follow the terms of the document which state the plan is a safe harbor (and one of the requirements is that you provide an annual notice) the plan is still safe harbor. this is a common misconception that failure to provide a notice means plan is not safe harbor and must be testing.

if you go to the following website, you will a bunch of issues addressed by the IRS:

http://www.irs.gov/retirement/sponsor/arti...=137958,00.html

your problem is choice #7. (if you were to number them) I consider this a valuable website to keep handy!

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[J Simmons]

I am advising a client in a similar situation--plan specifies it is a k safe harbor plan, but for some years no annual notice given.

Tom Poje's direction to those pages of the IRS website, particularly Failure to Provide a 401k Safe Harbor Plan Notice, has been helpful. The example of Indigo of Rainbow Company, and no corrective contribution needed for Indigo under the circumstances, was a more lenient correction method than I expected from the Service. Thanks, Tom, for reminding us of those IRS web pages!

[Kevin C]

I found it interesting that the article's other example is a participant who did not receive a SH notice AND was not notified of her right to make elective deferrals. I would expect that combination to happen when the employer doesn't realize the person is eligible.

Violet first became eligible to participate in the plan on January 1, 2008. She did not receive notice and Rainbow did not inform her of her right to make elective contributions to the plan. She earned $20,000 in compensation in 2008.

If participants received enrollment forms and an SPD, but did not get a SH notice, I'd argue it was much closer to the example with Indigo rather than the one with Violet.

[J Simmons]

Kevin C, we're thinking alike. That's exactly the argument (more analogous to Indigo than to Violet) I made in an e-mail yesterday afternoon to the IRS auditor. She's running it up the flag pole to her manager and closing agreement coordinator. I'll keep you posted as to how this turns out.