Testing Method for safe harbor

[Tom Poje]

notice 98-52 VIII E

clearly states

"...a plan that uses the safe harbor methods to satisfy the ADP or ACP test for a plan year is treated as using the current year testing method for that year and, thus, is subject to the rules...relating to changes from current year to prior year testing...

so for you document experts, does that mean the document MUST say testing method is current? If the document says 'use prior year testing' does the notice simply override it?

[Guest Tbrown]

Tom,

We are using the FDP document and have always checked 'current' on the adoption agreement whenever we have a safe harbor. I believe that the software will not allow us to check prior if we choose safe harbor prior to that. But as to the more important issue, what would be the possible outcome if you checked prior and were a safe harbor?, I couldn't say. But I wouldn't expect that this notice would override the plan provision.

Tim

[MWeddell]

Well, I'd guess the opposite, that the IRS notice overrides any inconsistent plan provisions. During years that the plan uses the safe harbor method to avoid the ADP / ACP tests (except for any after-tax contributions), then the plan is treated as using the current year method for those plan years. This would be true even if the plan document seems to imply that the prior year method is elected.

[Tom Poje]

since this was a Corbel plan, I called and talked to them, and the response was that the plan should be coded as 'current' if it is safe harbor. (The document software does not default to current if you select safe harbor)

I suppose it gets interesting if it was 'maybe we will give 3% SHNEC'

you would have prior year in the document, but if they actually made the SHNEC then you would have to amend the document.

[WDIK]

I am not familiar with the Corbel documents, but am curious as to the wording that they use with respect to the safe-harbor provisions. The prototype document I am looking at uses language such that the plan is deemed to satisfy the ADP/ACP tests once safe-harbor is elected. In my opinion, that makes the election of current year/prior year testing irrelevant for any such year. Then, for some future year in which the current year/prior year election is to be changed, notice 98-52 VIII E would apply and all safe-harbor years would be treated as using current year testing to determine if the change would be allowed.

Caveat: I am not a document expert, so I don't know if I'm allowed to address this question or not.

[KJohnson]

I think the document has got to state that it is using current testing, I don't think the s/h notice would override the document provsions. I agree with the others that if you are making the s/h contribution, what does it really matter? However, 98-52 is clear on the subject.

One place where it might matter is where the employer uses the "maybe" notice for the s/h NEC or decides to rescind the s/h Match mid-year. In those instances, after the RAP, I think you would be stuck with current year testing.

The other place that it would matters is if you wanted to switch back to prior year. Going to s/h basically prevents you from deciding to stop the s/h contribution and then reverting back to prior year. Once you decide to go s/h you have to stick with current year for next 5 years whether or not you stay with s/h.

[Guest Frank Berrodin]

So is it permissable to create a new 401(k) plan using prior year testing, give the contingent safe harbor notice by December 1 of the preceding year and then decide by December 1 of the current year whether to make the safe harbor contribution (which would require a plan amendment to include the safe harbor contribution and reflect the switch to current year testing)?

[Alf]

Doesn't the IRS's controversial position that a safe harbor plan has to state that it is safe harbor and remove all of the other testing language answer both questions? I am pretty sure that the IRS wants documents to reflect the testing method before the plan year begins.

[Guest Frank Berrodin]

Because this will be a new plan in 2004, I guess the way to get around this problem is to draft the plan using prior year testing and the first year rule, give the safe harbor contingent notice and decide by December 1 of 2004 whether to amend the plan to include the safe harbor. Since the remedial amendment period for the plan will not expire until the tax return filing deadline in 2005, we will submit the plan for a determination letter before then and if the IRS has any problems with the plan language, we will fix it then. Do you see any problems with this strategy?

[Guest PenGuy]

For our clients who wait until December 1st of the current plan year to decide whether to make the safe harbor nonelective contribution, the problem that I am having in our office is that it is not easy to draft a plan amendment which adds the safe harbor language to an exising plan document. We have a group of Corbel 401(k) plan documents which are GUST I compliant with GUST II snap-on plan amendments. The IRS would not give us a GUST II favorable determination letter based on our attempt at a safe harbor 401(k) plan amendment because there were too many places in the plan document to modify and too much language to add if we do not have standard language from Corbel or the IRS. I think Corbel's response was it would be easier to restate the plan document to incorporate the safe harbor language.

Our problem is that some of our clients will not be willing to pay for a plan restatement especially after going through the process of obtaining a GUST II favorable determination letter. How are other TPAs or consulting firms dealing with the issue of adding safe harbor 401(k) language into the current plan document for the clients who are using the wait-and-see approach each plan year?