What's up with the IRS and their apparent 180 on Safe Harbor plans?

[Brenda Wren]

Based upon all of the guidance we received and interpreted from the IRS since 1998, up until July 2003, we understood that a safe harbor plan could be operated on a year-by-year basis. The safe harbor features of the plan would be "triggered" upon the timely notification to employees. If you missed the notice deadline, your plan would revert back to normal plan terms, i.e. you would have to test the plan for discrimination. Lately there has been talk that you cannot use the ADP test as an alternative to making the Safe Harbor contribution. From what I understand, the IRS is taking this position to avoid possible abuses where it may look like a test will pass on its own, so the client decides not to fund the safe harbor contribution. Didn't they have this figured out BEFORE they gave us repeated guidance that safe harbor plans could operate on a "year-by-year" basis? Or when they came up with the so-called "maybe" notice? Where is this new school of thought coming from, the proposed final 401(k) regs? And if so, why do they appear to be enforcing their position now instead of after the regs are finalized? I understand the IRS is even having some practitioners remove the ADP testing language from safe harbor GUST restatement documents that are seeking IRS approval. How can they do this?? Haven't they already approved prototypes that were NOT written like this, i.e. DATAIR? All of this flies straight in the face of the "year-by-year" theory, the "maybe" notice, the ability to stop the safe harbor match. I have no clue how to advise clients about this. In the case of the 3% nonelective contribution, what is the point of the notice? Why give it out at all if you have to fund the contribution anyway? Does the "maybe" notice have a place at all anymore? In the case of the SH match, can you stop the match with 30 days notice? If you do, do you still get a free pass on the ADP since your plan no longer has ADP test language in it?

Is anybody else having as much trouble with this issue as me?

[WDIK]

Does having twelve questions in a single post set any records?

[Guest death and taxes]

Why do you ask? Who wants to know? Is it wrong to ask questions? What do you suggest is the proper number of questions to ask? Who should monitor the number of questions? Is there regulatory guidance on question-asking? Do you have a cite? Is there a seminar on question-asking? Who teaches it? Where is it held? Does it qualify for CLE? Is lunch served? Coffee?

[chris]

WDIK: twelve questions in a single post is no longer the record (see above post)...

I haven't necessarily noticed a 180 re safe harbor plans; however, I have not submitted any for review either. Is the IRS actually requiring the removal of the testing language in safe harbor 401(k)'s?

[Tom Poje]

under the proposed regs (or at least the preamble...)

"...it is not permitted to provide that ADP testing will be used if the requirements for the safe harbor are not satisfied."

..........

my understanding of plans that want to use the 'maybe nonelective' would be as follows

1 month before plan year begins, plan says they might go safe harbor.

at least 1 month before the next plan year plan is amended to include the nonelective safeharbor language.

I suppose the amendment could say "For plan year ending XXXX only" otherwise it would be permament.

And every year go through the process.

I can't say that the whole thing is necessarily a 180 degree turn by the IRS. when we were first amending documents we figured we put the safe harbor language in the documents just in case the company ever decided to go that route. But (at least in the case of the Corbel language) such language was written not as 'optional' (e.g. if the plan provides a notification about safe harbor), but rather 'required' contribution. we even asked them about that and they said that was what the IRS wanted.

I would agree that is different than anything I read about how the safe harbor operates. To me it sort of defeats the purpose of provided the notice since it is a required contribution.

[Brian Gallagher]

A lot of questions isn't bad, but a few paragraphs would have made it easier to read.

[Brenda Wren]

Tom, any thoughts with regard to the Safe Harbor match question? If you stop mid-year, do you still get the free pass?

[Tom Poje]

I think that is a good question.

My feeble brain isn't working so well at the moment (if it ever did)

Lets say plan was safe harbor match. Mid year they decide to discontinue the safe harbor match. If I recall, they have to give 15 days notice of benefit suspension, or something like that. I would guess (based on the proposed regs) the plan would also have to be amended to indicate not just 'no safe harbor match', but also how the testing would be done. That seems kind of round about, but what else could you do. (As opposed to having it in the document ahead of time how testing would be done if....)I see written comments for the proposed regs were suppossed to be in by 10/22 so I guess it is a little late to submit anything - hopefully someone raised the point.

My best guestimate!

[Brenda Wren]

Fortunately, it looks like ASPA was on top of it....I just read their comments on today's newsletter. We can only hope IRS listens. In the meantime, I think our firm will be OK; we use the Datair documents which very clearly have the "trigger" language in them.

Thanks to those who commented....even the jokesters and editors!

[KJohnson]

Here are the ASPA comments:

6. A plan that fails to meet the requirements of the safe harbor rules under §401(k)(12) and/or §401(m)(11) should be permitted to utilize ADP/ACP testing if the plan document so provides.

The proposals provide that it is impermissible for a plan to state that, in the event that the safe harbor provisions of §401(k)(12) and/or §401(m)(11) are not met, the plan will revert to ADP and ACP testing to show nondiscrimination.

Plans have been approved in the GUST restatement process that contain provisions permitting the application of the safe harbors in such years as the employer meets the requirements. Therefore, the position expressed in the proposals represents a departure from current practice. This departure is not mandated by the Code, which requires only that the cash or deferred arrangement meet the contribution and notice requirements. In fact, the very title of §401(k)(12)(A) (“Alternative Methods of Meeting Nondiscrimination Requirements”) contemplates that this is one means by which the employer can comply with the Code as an alternative to ADP/ACP testing.

This proposal interferes with a common and reasonable practice under provisions that are present in documents that have been the subject of favorable determination letters. Many pre-approved and individually-designed documents provide that a plan will operate as a safe harbor plan for a plan year only if notice is given to participants within a reasonable period prior to the beginning of the plan year. In this manner, the document itself uses the timely delivery of the notice as a trigger for when the safe harbor provisions apply to the plan. If notice is not properly given, the safe harbor provisions with respect to nondiscrimination testing are inapplicable and the ADP/ACP nondiscrimination testing is performed for such year. Prohibiting such “default” plan provisions will simply be a potential disqualification trap for no apparent policy reason.

ASPA agrees that, depending on the terms of the plan, the plan sponsor may still be required to make contributions at the same level as though the plan continued as a safe harbor plan. For example, the 3% nonelective contribution or 4% matching contribution may be required even though the plan is not a safe harbor plan that year for purposes of nondiscrimination testing. In other words, the plan sponsor must take action before the start of the plan year if it intends to remove such provisions or be liable for such contributions to the extent those amounts are required under the terms of the plan.

ASPA Recommendation: Remove from the proposals the requirement that plans not be able to “default” to ADP/ACP testing.