To What Extent Must a Match be Disclosed in the Annual Safe Harbor Notice Where the Employer is Using the QNEC to Meet the Safe Harbor Requirements?

[Guest Robin S. Vatalaro]

I have a client who makes the 3% annual QNEC to satisfy the safe harbor feature of his 401k plan.

The client also is considering (and the document permits) paying a match that doesn't exceed 4% of pay and doesn't match deferrals in excess of 6% of pay.

Notice 98-52 states that the annual notice must be written such that it is sufficiently clear to a participant the circumstances under which contributions other than the 3% QNEC (for this particular employer) will be made.

This client is using a prototype document that provided a sample safe harbor annual notice. The sample notice simply states "your employer may be permitted to make additional contributions to the plan - refer to your SPD." Of course it also directly addresses the 3% QNEC.

In my opinion, it is not "clear" in the sample notice that the employer intends to make the match. The employer won't decide until year end whether or not he actually makes the match, and the document is drafted such that the matching contribution is not required.

This client has three people eligible to participate. Himself, his wife, and one NHCE employee. "Himself" is the sole owner. He would like to avoid giving the NHCE a match. The NHCE has indicated she doesn't want to defer. She has been provided w/ the SPD. I don't think she really understands though the benefit of the match, should she change her mind and choose to defer.

Is the language in the sample notice sufficient - e.g. would it pass muster on audit or would the gov't say that the notice was insufficient and thus did not meet the requirements to be a safe harbor plan? Obviously I'd like to follow the wishes of the client, but I also want to make sure he's sufficiently protected upon audit.

Curious as to any opinions. Thank you!

[Archimage]

I can't remember the cite offhand but the IRS did issue guidance that stated a reference to the SPD is sufficient.

[Guest Hockey Mom]

Double check to be sure the plan is not Top Heavy - You will need to give a 3% Top Heavy min - unless you utilize the SH Match.

[Blinky the 3-eyed Fish]

I have a client who makes the 3% annual QNEC to satisfy the safe harbor feature of his 401k plan.

Hockey, this will satisfy that requirement. Well, I suppose it SHNEC could be from DOP...

[Tom Poje]

A couple of thoughts.

Notice 98-52 section VIII D

"To the extent they are needed to satisfy the safe harbor contribution requirement of section V.B, safe harbor matching and nonelective contributions may NOT be used as QMACs and QNECs under any plan for any plan year"

That is why I wouldn't use the term QNEC in referring to these contributions. (That is why some of us have been using the term SHNEC instead, just so there is no confusion)

As for the discretionary match, it is still discretionary. As long as the SPD lists the possible contributions that might be made I think you are all right. (That would be no different than a regular 401k with a discretionary match)

The cite is Notice 2000-3 Q-8, that the Notice provide 30 days before plan year begins may reference the SPD.