Safe Harbor 401(k) established, but employees not allowed to elect to

[Guest Carolyn Barnard]

I have a calendar year Profit Sharing Plan that added a Safe Harbor 401(k) feature with a 3% nonelective contribution on 7/21/02. The employer was provided with the Safe Harbor notice, but I'm not sure that the employees ever got a copy. I am sure that they were never given election forms to defer, and no deferrals have been deducted to date. What happens now? Neither myself nor any of my colleagues have come across this situation!

[Brian Gallagher]

i was under the assumption that the participants would have to get the notice in a timely manner BEFORE the plan year for which the SH was in effect. Sounds like this plan couldn't be SH until Jan, 2003.

Also, if the participants got the notices in August, it would be too soon. Generally we tell people to do the notices between 30 and 90 before the new plan year.

(And what did you mean that the employer was provided with the notice? Didn't the employer draft the notice?)

[2muchstress]

Brian, I think your assumption may be wrong. It is possible to add a safe harbor 401(k) feature to an existing PSP that does not already have a CODA feature in place. The addition of the SH 401(k) is treated similar to a SH 401(k) with a short plan year. I believe that the 401(k) feature must be in place for at least 90 days.

IRS Notice 2000-3 also indicates that it is possible to add the 3% SH nonelective to an existing 401(k) plan at any time before the END of the plan year provided that the following the provisions apply:

1) The plan must use current year ADP testing method.

2) That the employees be provided with notice that the plan MIGHT be amended to add a SH feature before the plan year, and

3) That a second notice be distributed to all employees that the plan is amending to add a safe harbor nonelective contribution 30 days prior to the end of the plan year.

IRS Notice 98-5 was more restrictive, but they changed their opinions and issued notice 2000-3.

[Guest Carolyn Barnard]

Brian, the plan's attorney drafted the notice.

So I'm thinking that whether the employees got the notice or not, the employer is still liable for the 3% nonelective contribution. I guess I'm just concerned that the employees not being allowed to defer is some kind of operational error.

[david rigby]

Careful review of facts and chronology.

- Plan attorney drafted a safe harbor notice.

- Attorney provided such notice to employer.

- Employer (apparently) did not distribute the notice.

- Employer (apparently) did not offer deferral elections to employees.

Sounds like the employer changed his mind about offering a safe harbor plan.

Is this correct summary?

[Guest Carolyn Barnard]

More like he got busy trying to build a new office (he's a successful plastic surgeon) and this retirement plan stuff is on the bottom of his list of priorities. I am still trying to determine if employees were notified. Meanwhile, it sounds like, if it were a case where the employer just changed his mind, that that's OK?

[kmciver]

If the employees did not get the notice timely, then the plan is not a safe-harbor and will require adp/acp testing. You may also want to review the plan doc especially if the attorney drafted it. If it is a newer doc, it may tell you what happens in the event of failure to comply.

Let's say the plan is not a safe-harbor. What about giving a QNEC to pass the test? Isn't this essentially the same thing as the 3% non-elective for safe-harbor. You may still need to refund to the HCE's but this seems to be a good solution.

[Guest Carolyn Barnard]

OK, no HCE's or NHCE's have deferred at all, so there's nothing to test. A Safe Harbor Notice was issued to the employer saying that it intended to give a 3% nonelective contribution, so I think, whether the ee's received the notice or not, they should be held to that. My question is, is it an operational error that, after amending the plan to include a 401(k) feature, no one was given the opportunity to defer? Is it akin to say, a frozen plan, where contributions are no longer being made...the contribution language exists in the plan but the plan sponsor chooses not to exercise that feature? Can it be a 401(k) plan, safe harbor or no, if ee's are not given the chance to defer? Is that a disqualification issue?

[david rigby]

"A Safe Harbor Notice was issued to the employer..."

Who cares? Issued by whom? It is the notification to the employees that is important.

[Guest Carolyn Barnard]

Again, the attorney for the plan drafted the notice and provided it to the employer for distribution to the employees...still trying to determine if distribution actually occurred. Still would like someone to address whether 401(k) deferral feature can be ignored if document is amended to provide for such.

[Jean]

The safe harbor is not permitted as the notice was not distributed to the employees.

Because the plan was amended to a 401(k), and eligible employees were not given the opportunity to participate in that component, then it is an operational failure which would require a contribution to the affected participants. There is guidance as to the amount in

RP 2002-47, Appx A. Exclusion of an eligible employee from all contributions under the plan for one or more plan years: The permitted correction method is to make a contribution to the plan on behalf of the employees excluded from a DC plan. If the employee should have been eligible to make an elective contribution under a CODA, the employer must make a QNEC to the plan on behalf of the employee that is equal to the ADP for the employee's group (HCEs or NHCEs). Contributing the actual deferral percentage for such employees eliminates the need to rerun the ADP or ACP test to account for the previously excluded employees.

As there was 0% deferred by both HCEs and NHCEs, then I think its safe to state that the required contribution is 0%.

Get that notice distributed to the employees

for January 1, 2003!

[Guest Carolyn Barnard]

Thanks, Jean!