Safe Harbor Non Elective Cont

[Alex Daisy]

A Plan Sponor has the Safe Harbor Non Elective Cont with a follow up Notice election in their Plan Document.

They amended the Plan in November 2009 to elect the 3% Safe Harbor Non Elective Cont for 2009 Only.

The Plan Sponsor just informed me that the company is in a critical stage of survival, and will not have the resources to fund the 3% Safe Harbor Non-Elective option of $35k.

What options does the Plan Sponsor have at this point?

What if they do not make the 3% Safe Harbor Non Elective Contributoon for 2009?

Any guidance is greatly appreciated.

ALEX

[austin3515]

No matter what, the Plan is due that 3%. No 2 ways about it.

Now, if the company goes bankrupt, the Plan has to wait in line with all of the other creditors. I dare say I have/had a plan in this sad situation, but alas you cannot get water from a stone.

What does it mean?

1) Don't panic until December 1st or so, which is a long way from today. You have 12 months after the PYE to fund the Safe Harbor in order to avoid ADP/ACP testing. Maybe there's a 415 issue, but if memory serves, contributions mandated by the plan are not subject to the 415 issues that come with people who terminated during the prior plan year.

2) On December 1st, if the money won't be collected, run the ADP/ACP tests and correct if necessary.

If the Plan happens to get audited, I'm not sure what they could do. The SH regs specifically planned on this eventuality by mandating ADP/ACP testing if the contribution is not made 12 months after plan year end. So because the regs tell you what to do in this situation, if you do it, I would presume the plan should not be disqualified. The only thing that would be problematic in my opinion would be if the owner was taking a big salary.

Now the DOL on the other hand, would probably give you a very very hard time. They would tell you you're violating every fiduciary rule there is, but that's their job - to make sure the money gets into the plan. I suppose they would say (perhaps correctly) that you can't ignore paying the plan and instead pay your vendors every single time. And I think it's very possible that an employee would call the DOL and complain which could very realistically result in an audit.

[BG5150]

I didn't think the ADP test would have to be run if the plan was a Safe Harbor plan. I had a similar situation, and here's the answer I got from TAG. Corbel gave me a similar answer.

Regulation section 1.401(k)-1(e)(7) (below) provides that the plan document must state how the nondiscrimination requirements are met. The plan document states that the 401(k) nondiscrimination requirements are met thriough the safe harbor contribution (under 401(k)(12)); the document does not provide for ADP testing under 401(k)(3). The plan cannot use ADP testing to satisfy the nondiscrimination requirements; the terms of the plan document must be followed. In this case, the document says (for the

2007 and 2008 plan year) that nondiscrimination will be satisfied under 401(k)(12); the safe harbor contribution. If we were to determine that ADP testing is required, the plan would have to be retroactively amended under VCP. I do not believe ADP testing under a retroactive amendment is required with regard to the late safe harbor contribution; the failure to deposit has been corrected once the amount required is deposited to the plan.

Emphasis mine.

[Tom Poje]

that would be my understanding as well, the quote is almost word for word from the preamble to the 401k regs

A PLAN that uses the safe harbor method MUST specify whether the safe harbor contribution will be the SHNEC or the SHMAC and is NOT permitted to provide that ADP testing will be used if the requirements for the safe harbor are not satisfied. The safe harbors are intended to provide ees with a minimum threshold in benefits in exchange for easier compliance for the plan sponsor. It would be inconsistent with this approach to providing benefits to allow an employer to deliver smaller benefits to NHCEs and revert to testing

In a similar veain, from the Q and A American Bar Association (ABA) Committee on Employee Benefits Q and A May 9, 2003

Company A adopts a safe harbor 401(k) Plan. IRS insists that each year that the safe harbor election is used, the employer must amend the plan to provide that the safe harbor contribution will be employed for that year. Is this correct?

Proposed Response: If the plan contains a default provision, annual amendment to employ the safe harbor is not necessary. The acceptable default provision provides that in any year where the required advance notice that the safe harbor fails to be given, the Plan is subject to the standard ADP test. The employer can file a copy of the safe harbor notice with the form 5500. This procedure cuts down unnecessary paperwork and is consistent with the statute providing for the safe harbor.

IRS Response: The IRS disagrees with the proposed answer. Notice 98-52 requires a notice to participants before the beginning of the year indicating the plan may be amended during the year to provide for a safe harbor nonelective contribution, and Notice 2000-3 provides for some flexibility by providing a supplemental notice to participants and amending the plan to provide for the nonelective contribution by December 1 of the plan year. There is NO DEFAULT OPTION under existing IRS guidance. (Emphasis mine)

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

now all that being said

1.401(k)-3(h)(1) does indicate that the "safe harbor must be deposited within 12 months to be taken into account for the plan year" but there are no additional comments that say otherwise you must using the ADP /ACP.

but maybe all that means is that it starts the clock running for when you calculate earnings on the late contribution.

[austin3515]

So that's it - pay lost earnings and you're good to go? Barely a slap on the wrist? I have to say it seems very bizaar that the ADP test is not imposed. I always thought it was whenever you didn't follow the SH rules..

[Tom Poje]

I think its unclear at best what happens after 12 months.

we know if the full contribution is not made before 12 months, then the regs specifically say you must test (even though a safe harbor was made through part of the year). I can understand that since a full 12 months of contributions was not made. but in the case where it is late, a full 12 months was eventually made, and being late is a faiure to follow the terms of the document, as oppossed to amending a plan mid year to change from being a safe harbor - so there is a bit of a distinction.

[austin3515]

This paragraph of the reg specifically says it will NOT be taken into account. I would read that to mean if it was funded late, it is assumed not to be made. Out of curiosity does anyone else come to the conclusion that no ADP test is required?

(h) Additional rules —(1) Contributions taken into account. A contribution is taken into account for purposes of this section for a plan year if and only if the contribution would be taken into account for such plan year under the rules of §1.401(k)–2(a) or 1.401(m)–2(a). Thus, for example, a safe harbor matching contribution must be made within 12 months of the end of the plan year. Similarly, an elective contribution that would be taken into account for a plan year under §1.401(k)–2(a)(4)(i)(B)( 2 ) must be taken into account for such plan year for purposes of this section, even if the compensation would have been received after the close of the plan year.

[Tom Poje]

I have no problem with your argument, its simply that in the context as presented by IRS officials at both ASPPA and ABA (unless I am really missing something) the officials have never said you must both make the contribution and ADP test as well. so who am I to argue with them, TAG and Corbel. Now, without going back and rereading the questions as originally posed to see if it was specified in the context what the timing of the contribution would be (before or after 12 months deadline) it could be that the IRS officials (as well as TAG and Corbel) were considering a time frame of less than 12 months when answering the question.

[austin3515]

As an aside, if funded more than 12 months after the end of the plan year, are you including lost interest on the amount until funded?

[K2retire]

Is anyone else frustrated that this incredibly common issue is not addressed by EPCRS?

[BG5150]

yes!

As an aside, if funded more than 12 months after the end of the plan year, are you including lost interest on the amount until funded?

[austin3515]

Does depositing the Safe Harbor after 12 months plus interest preserve the top-heavy exemption?

[Kevin C]

If the late deposit of the safe harbor contribution is corrected using Rev. Proc. 2008-50, I think you do preserve the TH exemption and the safe harbor.

The correction is treated as an annual addition for the year it would have been if it wasn't late (Section 6.02 4(b)). The correction fixes the qualification failure, which is the failure to follow the document and timely deposit the SH contribution (Section 3.01). And the main purpose of the correction is to restore the plan to where it would have been if no failure had occurred (Section 6.02 (1)). With all those pieces, I think they are saying that after proper correction under EPCRS, the IRS treats the plan as if the failure had not occurred.