Plan runs aground on shoals in a not-so-Safe Harbor

[Guest Hilarion]

We are directed trustee for a Safe Harbor plan that was recently audited. The employer admitted to the IRS that the Safe Harbor notice was not consistently given each year. Consequently, the plan is subject to testing for those years in which notice was not given, and its ADP test failures are pretty egregious.

The employer did consistently give the 3% nonelective contribution, even in those years for which notice was not given.

Apparently, the Service did not impart any information about possible corrective measures. Would it be possible for the employer to recharacterize the nonelective contribution as a QNEC?

[Alf]

It really is not going to be the same, I'll guess (vesting, distribution restrictions, etc.), but you are in audit CAP, so anything goes. It is a pretty unique situation (3% NEC AND safeharbor match), so I'll guess that if it is presented correctly, it could be sold to the IRS.

[Blinky the 3-eyed Fish]

It sounds like the 3% was given as a safe harbor contribution, just the notice wasn't provided. Thus, that money would have the same vesting and distribution restrictions as a QNEC. Alf, where's the match?

Anyway, Hilarion, I think you have possibilities to make this work. First, check your document. There may be some obscure language in their that defines the SH contribution when a notice is not provided. After all, what's the purpose of the SH contribution without the notice. It's a long shot, but the doc may take that into account. Second, like Alf said, propose the idea to the the IRS anyway. They may go for it.

[Archimage]

At the recent ASPPA conference, a question was asked of the IRS how the plan was handled when the SHNEC was provided but failed to give the notice. The IRS responded by saying that you have an operational failure and the corrective measure is to distribute the notice. They also said this was not possible for a SHMAC.

[Tom Poje]

at the 2004 ASPPA conference this was similar to question #16 of the IRS Q and A's.

response: failure to provide notice is an operational defect which should be corrected under EPCRS. [ooooohhhh. I like that. its operational, the formula is in the document. that should give some leg to stand on]

it was discussed additionally from the podium, basically that there are no guidelines. Take your chance with whatever correction you choose. With a SHNEC simply provide the notice (since the SHNEC was already made and it doesn't really effect if someone defers.) If it involved a match, solution would be different. [if I recall, no solution was provided]

now, of course Q and A's are not written in concrete, an opinion expressed by one or more IRS agents. The example at the conference involved a 2004 plan year.

In this particluar instance it was indicated the error has occurred over a number of years...so that doesn't help. one of the points of EPCRS is there are practices in place that prevent such things from happening. still, the argument would be 'who was hurt by the failure not to provide the notice when the contribution was made anyway'?

[Guest TrustMe401k]

It seems in this case that since you have contributed the 3% SHNEC then the notice serves no "real" purpose. This assumes that the notice requirement makes sure that employees know that if they don't defer, they may miss out on a substantial match. Since we have no match here, or at least not one that satisfeis the SH, I think you have a pretty good argument that distributing a notice now is an appropriate corrective measure. The vesting, etc. are the same a QNEC so could they really argue with that? OK...dont' answer that question. Better question...Should they argue with that point?

[Blinky the 3-eyed Fish]

Now because the first post says the plan has been audited, past tense, then of course providing the notice as a solution will have to be approved by the auditor as a means of correction. Arch and Tom provide good ammo to go to the auditor with.