Safe Harbor "Wait and See"

[Guest DTromb]

A non-safe harbor plan, written on a prototype document, sent a "Wait and See" Safe Harbor nonelective notice to the participants in a timely manner prior to the start of the 2005 plan year (calendar year plan). The plan sponsor notifies the participants in 2005 that the plan will be amended to be a Safe Harbor plan for 2005.

For 2006 they decide to use the "Wait and See" approach again. Does the Plan therefore have to be amended again, prior to 1/1/2006, to remove the safe harbor provisions, or is it ok to leave the safe harbor provisions in the plan pending the plan sponsor's decision regarding the safe harbor contributions later in 2006?

Thanks!

[Tom Poje]

If I understand you correctly, it sounds like plan was amended to include safe harbor language.

does it also 'for the plan year 2005'.

my understanding that is how it would work. in other words, something like

Amendment #1 for the 2005 plan year a 3% shnec will be made.

If there is no such reference then it sounds like the plan was amended permanently to use the SHNEC until an amendment is made taking it out of safe harbor. in other words, you cant really use a wait and see since the language is in there

I could certainly be wrong, I would check with the document provider.

[Guest DTromb]

Thanks Tom, and let me clarify a bit...

The safe harbor provisions in the adoption agreement were not checked until the plan was amended in Nov of 2005 so that the employer could act on the original "wait and see" notice provided in Nov of 2004.

As of Nov 2005 the adoption agreement now has the safe harbor provisions checked, however the plan sponsor would like to take the same "wait and see" approach for the 2006 plan year.

Here is what the document provider told us:

"If you are using our prototype you can go in and out of safe harbor simply by providing the proper Notice(s). Of course the formula has to be in the AA."

I know when the GUST documents first came out with safe harbor provisions it was thought that the adoption agreement could be written so that the safe harbor provisions could be checked and that the notice requirement would determine if the plan was to be a safe harbor for that year, however I thought the IRS had said that was not acceptable.

I guess the question is, even if the employer uses a "Wait and See" notice for 2006, if they enter the 2006 plan year with the plan document still containing the safe harbor provisions, are they then bound by the terms of the plan for 2006. I know you can amend a safe harbor match out of the plan mid-year, but does the same go for the nonelective? If that is the case then it seems to me that the "Wait and See" notice would have to say something like, "We are currently a safe harbor plan, but we may amend back to ADP testing before the 2006 year is over". I don't remember seeing that as an option.

[Bird]

The safe harbor plans that effectively use the "wait and see" provisions should have the safe harbor language, with something that says "this language is effective in years in which a notice is given" or something like that. That doesn't sound like what you described; you may very well have a "permanent" safe harbor. Your document provider says otherwise; I think I'd challenge them to tell you where that language is.

IMO using the "wait and see" or "maybe" approach is not the same as "We are currently a safe harbor plan, but we may amend back to ADP testing before the 2006 year is over" (which is not allowed under the final regs, if I'm not mistaken).

[Guest DTromb]

Thanks!