401(k) Safe Harbor Document Language

[Guest jvanheyde]

I have two 5300s pending with the IRS, and the IRS agent assigned to these files has, for the first time in my experience, requested that I remove the ADP and ACP language from the plan document because I have another provision that allows the employer to utilize the safe harbor methods of 401(k) and (m) to satisfy discrimination. I don't understand why the ADP and ACP language cannot co-exist in the document with the safe harbor language. The client may want to use safe harbor in year one, and rely on the general ADP/ACP test in later years.

Has anyone had this experience with the IRS?

[Tom Poje]

I haven't had time to read all the proposed 401k regs, but the explanatory comments contain the following:

"...it is not permitted to provide that ADP testing will be used if the requirements for the safe harbor are not satisfied.. It would be inconsistent with this approach to providing benefits to allow an employer to deliver smaller benefits to NHCEs and revert to testing"

so, at least in regards to the SHNEC, this goes against what I understood, that is, to say "We might go safe harbor" for a given year.

It looks like it is all or nothing. If you say you might go safe harbor then a month before plan year end you actually amend the plan to be a safe harbor, and then you are stuck at safe harbor unless you amend the plan out of it.

[E as in ERISA]

Is the problem just that your provisions use the "prior year" testing method and you need to use the "current year" method if you are going to be switching to and from safe harbor? I'm not aware that there is anything in the IRS check sheets (http://www.irs.gov/retirement/article/0,,id=97188,00.html) that require elimination of ADP/ACP from the document.

[Guest jashendo]

It is not directly on point, but on a similar note. . .

In today's BNA Pension & Benefits Daily, in an article describing discussion at a meeting last week (Mountain State Benefits Conference) concerning 401(a)(4) safe harbors, an IRS panelist (Angelo Noe) is quoted as saying that failure of a safe-harbor plan to meet safe-harbor requirements would result in plan disqualification -- not merely a need to perform 401(a)(4) testing.

"But Noe said safe harbor plans that fail to meet the safe harbor requirements would not merely result in the plan sponsor having to conduct numerical testing, but would in fact result in plan disqualification, a pronouncement that drew a startled groan from the audience members. "

Same rationale as saying you don't need ADP/ACP language in safe-harbor plan. You couldn't pass on a "non-safe-harbor" basis, so why bother with the plan provisions.