Employer fails to make the Safe Harbor contribution. Now what?

[katieinny]

An employer does not make the required Safe Harbor contribution for 2004. Therefore, the TPA ran the ADP/ACP tests because the plan is no longer a Safe Harbor Plan. As a result, the TPA returned excess contributions to the HCEs and is saying that tax and the 10% early withdrawal penalty is due on the distribution of excess contributions.

I just did some reading (2003 information) saying that a missed safe harbor contribution shouldn't be fixed that way. According to the piece I read, missing a safe harbor contribution could cause the plan to be disqualified and the contribution should still be made, plus earnings. It sounds like it needs to go in under the EPCRS program.

I wanted to get the viewpoint of other practitioners.

[Tom Poje]

I hit on this one in my ASPPA talk last year, and am going to repeat the talk again this year.

you have a document.

it says the plan is safe harbor.

Therefore, if no safe harbor was provided, you have a failure to follow the terms of the document.

it is not a matter of simply running an ADP test. in fact, the new 401k regs state you

the preamble to the final 401(k) regs makes it real clear

Preamble to the final regs

A PLAN that uses the safe harbor method MUST specify whether the safe harbor contribution will be the SHNEC or the SHMAC and is NOT permitted to provide that ADP testing will be used if the requirements for the safe harbor are not satisfied. The safe harbors are intended to provide ees with a minimum threshold in benefits in exchange for easier compliance for the plan sponsor. It would be inconsistent with this approach to providing benefits to allow an employer to deliver smaller benefits to NHCEs and revert to testing.

the only 'out' is if the plan used the 'maybe we will do safe harbor', but your question implies this is not the case.

now, when is the contribution due?

notice 98-52 VII A

.....no later than 12 mpnths after the end of the plan year.

if your plan year end was 12/31/2004 then there is no self correction yet. you still have time.

the self correction would be the return of the distributions that were made that should not have been made.

now,if the safe harbor was over a year late, then I think you still have to make them. but at that point I dont think there are clear guidlines. Since you are not allowed to use deferrals in the ADP test that are deposited a year late, I would guess the same rule applies.

The free ride on the ADP test is botched, so you would have to run a test.

the safe harbor would have to be used in the nondiscrim test, but since all received 3% I wouldn't think that would be a problem testing. all of this is a big guess.

[JDuns]

Tom's post hits on one of my hot buttons, what if the only violation of the safe harbor is that notice was not actually provided. If the plan contains the safe harbor language and makes the safe harbor contributions but the notice is not, in fact, provided, it is my understanding that the plan would have to run the ADP/ACP test.

I do not see the point of removing language that sets forth how the ADP/ACP tests will be run and how HCE excess deferrals would be returned if the plan fails to distribute the notice (since that is what happens under the regs if an error occurs.)

Can anyone explain what I am missing here?

[Tom Poje]

at the IRS Q and A (I think it was 2003, fall ASPPA conference) the IRS said the solution was to simply provide the notice. If it involves the SHNEC probably no further steps are needed. Since all get the SHNEC it generally should not effect whether the person defers or not.

If the safe harbor was a SHMAC even the iRS didn't offer a solution - possibly a make up deferral for those that didn't defer at the average rate of deferrals in addition to the SHMAC.

In either case, there was not a 100% guarantee either would work under EPCRS, but that disclaimer goes with any IRS comments at any conference.

[KateSmithPA]

Tom:

Client did not contribute 2003 SHNEC. We are going back and doing ADP test. They will correct by contributing a QNEC (it is cheaper than one-to-one). You said above that the SH must be included in the nondiscrimination testing. Is it included in the ADP or the ACP? If ACP, since there was no other employer contribution, it should pass, correct?

Also, to anyone out there, do we caclulate earnings on the QNEC and/or the SHNEC which they still haven't contributed? If so, from what date?

[Tom Poje]

KateSmith:

I really don't know what happens.

under the new 401k regs, SHNEC are referred as QNECs (1.401(k)-3(e))

but we know QNECs are not permitted 12 months after the end of the year.

On the other hand, Notice 98-52 says SHNECs wont be used as QNECs for any plan year. go and figure.

Since the SHNECs are required (rather than allocating a QNEC because of testing failure) your plan would have failure to follow the terms of the document, so I would say you simply have to make the SHNEC. since it is due 12 months after plan year, I would think you would accrue interest from 12/31/2004 on.

1.401(m)-2(a)(4) (while this applies to the ACP test, a similar rule exists for the ADP test, I am too lazy to hunt through and find it since I found this section already) says if the contributions are over 12 months old then they aren't used in the ADP/ACP test but rather in the 401(a)(4) test.

I am guessing this means:

plan is safe harbor, so you get free ride on ADP test (or maybe a better way of putting it, you run the test, it doesn't matter what the numbers are you pass)

contribution is late late late.

you still get the free ride, but now you have to run an a(4) test, which should be a moot point since all receive 3% anyway.

again, all that is a big guess.