Safe Harbor 401(k) Doc issue

[goldtpa]

I just wanted to alert everyone to situation here in our office. We prepared a Safe harbor 401(k) for a client. The clients attorney made some changes to our volume submitter plan and it was submitted to the IRS as an ind doc.

The IRS has said that all non-safe-harbor language must come out. For example the IRS agent wants us to remove all of the language that relates to the ADP/ACP test, as a SH 401(k) is not required to be tested. The IRS said that they do not want employers defaulting to the testing if they dont follow the SH matching.

We called our doc provider and they said that they were told by the IRS Volume Submitter agents that this was not true.

They said that they are going to fight this and I thought every should be aware.

this would cause a real admin problem for people who in a particular year, don't follow the SH rules.

[Kevin C]

This is from the preamble to the final 401(k) regs:

Additionally, a plan that uses the safe harbor method must specify whether the safe harbor contribution will be the nonelective safe harbor contribution or the matching safe harbor contribution 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 employees 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. Accordingly, if, at the beginning of the plan year, a plan contains an allocation formula that includes safe harbor matching or nonelective contributions, these regulations clarify that, except to the extent permitted under §1.401(k)-3 and §1.401(m)-3, the plan may not be amended to revert to testing for the plan year.

Complete removal of all of the ADP/ACP language seems overkill when language could be used to provide that ADP/ACP testing will not apply for a year if the plan contains a SH contribution. Hopefully, your document provider can work this out.

If you are wanting the plan to default to testing if they mess up their safe harbor, you will probably have an uphill battle.

[A Shot in the Dark]

The mistake was made in allowing the client attorney (I would bet a non-ERISA practice) touch the document.

[Tom Poje]

also:

in the case of a plan that eliminates a match during the year

Treat the termination of the plan as a reduction or suspension of safe harbor matching contributions 1.401(k)-3(e)(4)(i)

Notice of suspension provided 1.401(k)-3(g)(i)

30 days notice 1.401(k)-3(g)(ii)

Employees have reasonable chance to change deferral elections 1.401(k)-3(g)(iii)

Plan amended to provide ADP test will be satisfied using current year method 1.401(k)-3(g)(iv)

now, if plan has testing language in it, then the last point makes no sense, why would you need to amend the plan to provide a test?

as the preamble indicated, a lot of this was 'clarification' of safe harbor plans. Thus, it doesn't surprise me, at least in regards to new documents the IRS doesn't want the language in there. (Though they haven't explained how you 'documentize' plans that do a maybe SHNEC each year.

[Guest Pensions in Paradise]

Ok, I understand the concept that if a plan says its a safe harbor then you shouldn't need ADP/ACP language in the document. But the real world isn't so clean.

So what happens when the client forgets to distribute the safe harbor notice. Is it still a safe harbor plan?

Or what happens when the client doesn't fund the safe harbor contribution within 12 months after the end of the plan year. Is it still a safe harbor plan?

And if the answer to either of the above questions is no, then what are the alternatives??

[JanetM]

You would still need the language if you allow after tax contributions.

[Tom Poje]

this is the whole issue of safe harbors, and why the document must contain the safe harbor language.

if a notice is not issued, you have an operational failure. the IRS has indicated (informally) in the case of a 3% SHNEC, self correct by issuing the notice.

no guidelines were offered if the plan was a SHMAC.

in the case of deposits not being made - again, an operational failure - no different than if you had a money purchase - you have a required contribution to make.

[Guest Pensions in Paradise]

But if you deposit more than 12 months after the end of the plan year than you lose safe harbor status. So if the plan does not contain ADP/ACP language, and you've lost safe harbor status, what happens??

[Tom Poje]

at the 2002 ASPPA conference the situation regarding late contributions was asked.

"It would appear that the plan is no longer safe harbor and must perform ADP (and possibly ACP) testing.

Additional safe harbor contributions still must be made. Contribution is made (with earnings) 18 months after plan year end. In performing testing, can the safe harbor contribution be considered a "corrective" QNEC per Rev Proc 2002-47?" [EPCRS]

Answer:

The premise posed is incorrect. If you don't make the required Safe Harbor contribution you have a potentially disqualified plan! The above correction seems reasonable.

as always, any such IRS responses do not necessarily represent an official position.

the response in this case seems consistent with things.

the document says plan is safe harbor.

thus plan is safe harbor. end discussion.

you make the contribution and go on with life. the plan does not cease to be safe harbor simply because the contribution is late. that is a false premise.