Safe Harbor Notice mid-year non-Safe Harbor contribution change

[Guest LStein]

We have a calendar year 401(k) plan that is Safe Harbor. When the notice went out it stated a 3% SHNEC will be given to all eligible participants along with a Discretionary Match. Historically, this plan gave 66 2/3% on the first 6% deferred. Can the plan be amended now (retroactively to 1/1/05) to provide a fixed formula match of 300% on the first 6% deferred? Would this in any way be violating a Safe Harbor Notice content requirement? In addition to amending the document and distributing a SMM would we need to distribute an amended Safe Harbor Notice?

[Tom Poje]

are you saying they wish to no longer provide the 3% SHNEC, and instead use the fixed match?

If so, then no, you cant retroactively amend. you will have to wait til next year. the regs are fairly clear on this.

Think of it this way - you told me you would provide a 3% SHNEC. therefore I chose not to defer. now you want to change things and provide a match, so I have lost out on deferral time. IRS would frown on such a practice.

[Guest LStein]

No, there will still be the 3% SHNEC. The non-Safe Harbor match is all that will be changed, from Discretionary to a fixed formula.

[Tom Poje]

I have misgivings about that. My understanding the formula must be determinable before the plan year begins so employees can make their informed decision. the one exception of course being the 'maybe SHNEC', but with that it doesn't matter whether you defer or not.

There is a big difference if you said you might have a discretionary match at 66% and a definite 300% match.

[R. Butler]

I may be inclined to be a little more aggressive here, but I wouldn't amend the plan. Why do you have to amend the plan? You say the cap is still 6% of deferrals. You state that the rate is discretionary, so in the employer's discretion just increase the cap to 300%.

If you didn't specify a 66% rate of match in the SH Notice I don't necessariy see a problem with the employer in their disrection increasing to 300%. Although I agree that the safe contribution formula must be specific; Notice 98-52 specifically allows you to reference discretionary matching contributions.

Now I will note the following:

1. If you were changing the cap on the match (i.e. matching on the first 6% to maybe the first 4% or 8%) then my answer would change.

2. If the employer has been throughout the current plan year already I may think harder about it.

[Guest LStein]

The only problem with keeping it as discretionary and not changing to fixed formula is that the limit on a discretionary match is 4% of compensation. 300% match on the first 6% deferred could be up to 18% of compensation.

The biggest issue is... will we lose the Safe Harbor status because the Notice stated a discretionary match not fixed? If we can make this change, what type of notice needs to be provided at this time.

[Tom Poje]

The difference is testing. while you could provide a discretionary at 300%, you would have to run an ACP test either on all match, or those amounts above 4% of comp. If it was a fixed match capped at 6%, then you get the free ride

[R. Butler]

O.K. never mind my post then. The 2nd post said it was a non-Safe Harbor Match so I just assumed you were fine with the ACP test.

Sorry