Mid-year termination of 3% safe harbor

[Guest Darrell]

Can an employer who gave timely notice of its intention to make a 3% nonelective safe harbor contribution and whose prototype adoption agreement provides for a 3% safe harbor nonelective contribution amend its adoption agreement in mid-year to remove the commitment to make the 3% safe harbor contribution? I recognize that the plan would have to satisfy the ADP test for the entire plan year using current year testing. I also recognize that 411(d)(6) will require the employer to make the 3% contribution with respect to compensation earned through the date of the amendment. But does this 411(d)(6) protection attach at the beginning of the year to the participant's compensation for the entire year? My analysis is that the employer would be able to terminate the plan in mid-year and avoid having to make the 3% contribution on compensation paid after the termination date, so the employer should also be able to accomplish the same result by a plan amendment. Notice 2000-3 addresses this issue for matching safe harbor contributions, but not for nonelective safe harbor contributions. I would appreciate any input on this.

[Guest Darrell]

I just receive the following reply from Dick Wickersham on this question: My view is that once a k plan adopts the SH-3% for a year it is stuck with it. It will fail 401k if it is amended during the year. The 2000-3 contingent SH is the only way to change a 3% SH. I hope this is helpful.

[Jean]

I have had a similar situation, for a traditional 401(k) plan. The employer issued a memo stating that the employees would receive matching contributions. There was no plan year beginning date or ending date on the memo. The match contribution was never paid. Upon audit, the memo was viewed as a promise to pay -- "you will receive" statement was in the memo. The starting date was determined to be the date of the memo and the ending date was after a second memo was issued stating that it would no longer be paid. The time period between the two memos was 4 plan years.

[IRC401]

1. Notice 2000-3 is a notice, not a law or regulation. It is a safe harbor notice for implementing safe harbor contributions. The IRS has not stated anywhere that it is the exclusive way to utilize the statutory safe harbors.

2. Where has the IRS stated that failure to follow a safe harbor notice could lead to plan disqualification (as opposed to not being able to avoid ADP testing)?

3. Nothing in the law or regs that I am aware of prevents an employer from amending his plan prospectively.

The "Wickersham view" may be an nice anal-retentive conservative position, but I am not aware of any authority to support it. Is anyone else?

The employer should be able to amend the plan prospectively to drop out of the safe harbor.

PS: If anyone decides to drop out of the safeharbor, you need to check how the plan document deals with failed safe harbor contributions.