"Hard Wired" Safe Harbor Election?

[ERISA1]

I have a prospective client. They are on a pre-GUST prototype document prepared by The Benefit National Companies. It has a provision which reads:

"Within the time period described below, the Employer will provide written notice to each Participant that the Employer will make...(a 3% non elective safe harbor contribution)" The employer DID NOT give notice within the required time frame.

I have 2 questions, and will appreciate your input, particularly, on the second:

1. Do you think the plan is subject to a safe harbor contribution requirement? Even though the document says the employer will give notice, he did not do so. Would you agree that this would be an operational violation that can be self-corrected by applying the ADP test?

2. At the recent ASPA Annual Conference, General Session 4 involved IRS Q&As. Question 16 (from the handout materials) spoke of a truly hard wired safe harbor election. In that question, NO notice was given. The questioner asked (a) must the plan perform the ADP test, and (b) must the 3% still be contributed. THE IRS RESPONSE was: "No; You have an operational defect which should be corrected under EPCRS. This will be additionally discussed from the podium." DID ANYONE HEAR WHAT RESPONSE WAS GIVEN FROM THE PODIUM? What is the operational failure, and how is it to be corrected?

Thank you very much!!!

[Tom Poje]

response was 'there are no published guidelines. take your chance if it was a SHNEC, simply provide a late notice. Match would be different'

I suspect for the match, that would imply providing a QNEC for all ees who didnt defer 'because they didnt know about it'

The proposed regs (the final 401k regs are to be released soon, I suspect they wont change much) are clear:

A plan can not revert to testing.... so it is operational.

so, I would say you have to make the safe harbor, provide the notice late and you are lucky because it is the SHNEC rather than the SHMAC, and they will probably let you off. again, the answer was 'take your chance' and Q and As are informal opinions by IRS agent, but since they had a chance to discuss beforehand, probably fairly reliable.

SHNECs will probably get off the hook because they dont really effect a persons deferral rate.

[Archimage]

As Tom mentioned I also got the feeling that it was fine to issue the notice for a SHNEC and you would still be fine for exemption from ADP testing. They did say they did not feel this way for a SHMAC.

Again there is no guidance and this was only an opinion if the IRS panel.

[ERISA1]

Thanks Tom. I get the impression that IRS offers only one solution - pay up.

What if the Employer is insolvent?

Do you think the document in this case leaves any room to argue that it is not hard wired?

[Tom Poje]

well, you raise an interesting question.

my guess is that there are a number of documents out there (with determination letters) that probably don't meet the 'requirements' that the IRS wishes. These documents were written when safe harbors were first available. Without mentioning names I knwo of one that has changed (at least in my opinion) quite dramatically.

The proposed regs are pretty clear in regards to short plan years

...if employer incurs substantial hardship....employer makes the contribution for the short year, employees are provided notice of the change and plan passes the ADP test....

If there is no money then I am not sure what the IRS could do. In a DB plan sometimes the Key ees will waive part of their benefit, but DC is different since you have actual account balances.