Can safe harbor contributions be turned off/on, year to year?

[Santo Gold]

When s/h 401k plans are created, is the s/h contribution optional each year, or is optional (i.e., you can go from s/h to non s/h on a year to year basis)? I'd like to be able to switch year-to-year, but the following document passages lead me to believe otherwise.

The plan document seems pretty conclusive. Under a section titled Safe Harbor Non-Elective Allocation Formula:

"The Employer shall make a fully vested contribution to each Eligible Employee equal to at least 3% of his or her Compensation for the Plan Year."

Nothing potional about this, so that means the 3% contribution is required each year. However, in the next sentence, it adds:

"If the Safe Harbor Notice requirement and the Safe Harbor Non-Elective Contribution are satisfied for a plan year, the nondiscrimination tests under IRC §401(k)(3) and IRC §401(m)(2) are not applicable"

I can understand that if the s/h notice is not provided in a timely manner, than the plan is subject to the 401k/m tests. But since this passage also considers whether the s/h contribution is satisfied, does that it may be optional? I may be reaching here.......

[Tom Poje]

no no no.

if the document has safe harbor language, the plan is safe harbor. end discussion. the document says the 3% will be provided. the IRS has said this at a number of conferences. If the notice is not provided, you have an opeartional problem. At similar conferences they have expressed an opinion that it it probbaly self correctable by issuing a notice, even if it is late. if it involves a match, they have not offered any real guidelines.

now, the final 401k regs have made it real clear, you can offer the 3% nonelective on a year to year basis.

issue a notice 30 days before plan year begin that you might go safe harbor. 30 days before plan year issue another notice saying whether you actually will provide a 3% AND then amend the plan for the CURRENT YEAR only (if that is what is desired) providing such. 1.401(k)-2(f)

now, exactly what is suppose to be in this amendment I am not 100% sure of. based on the regs, plan is supposed to already be set to current year testing.

[Bird]

I agree with Tom. I'd add that:

the plan with the language quoted could, I believe, be amended to turn this language on and off - but with this particular language, I think the amendment would have to be done before the beginning of the year in which you're turning it off, and before the beginning of the year in which you're turning it on. The notice has to be given 30+ days before the beginning of the year in which the SH is used.

This language is not appropriate for the "maybe" notice.

[Santo Gold]

no no no.

if the document has safe harbor language, the plan is safe harbor. end discussion. the document says the 3% will be provided. the IRS has said this at a number of conferences. If the notice is not provided, you have an opeartional problem. At similar conferences they have expressed an opinion that it it probbaly self correctable by issuing a notice, even if it is late. if it involves a match, they have not offered any real guidelines.

now, the final 401k regs have made it real clear, you can offer the 3% nonelective on a year to year basis.

issue a notice 30 days before plan year begin that you might go safe harbor. 30 days before plan year issue another notice saying whether you actually will provide a 3% AND then amend the plan for the CURRENT YEAR only (if that is what is desired) providing such. 1.401(k)-2(f)

now, exactly what is suppose to be in this amendment I am not 100% sure of. based on the regs, plan is supposed to already be set to current year testing.

Tom: Thanks for replying, but could you clarify what the distinction is between your first and second paragraphs. In pp1, you say it's clear that if the plan is safe harbor, the 3% must be provided, no wiggle room. But in the pp2, you mention about offering the 3% on a year to year basis.

[Guest facade]

Tom: Thanks for replying, but could you clarify what the distinction is between your first and second paragraphs. In pp1, you say it's clear that if the plan is safe harbor, the 3% must be provided, no wiggle room. But in the pp2, you mention about offering the 3% on a year to year basis.

There is a definite 3% SH and a maybe 3% SH. If the document uses the definite method you can change it year to year but only by amending the plan before the start of the upcoming plan year. If it is the maybe version there is no need to amend you just give the supplemental notice which declares whether or not the SH will be met.