Safe Harbor 3% NE

[Guest Powers]

I have a client that has a 401(k) Cross-tested Safe harbor plan. They just informed us this week that they decided not to do the safe harbor and they elected not to send out the safe harbor notice last year for the 2006 plan year. I think they thought it would save them $$. In any event, they are failing the ADP/ACP with hefty ($4,000+) refunds to all 8 of the HCE's and I was wondering what if anything could be done. Historically they have allocated an 8% employer contribution with the 3% non-elective and an additional 5%. As the safe harbor is the 3% NE and would have no effect on whether the employees deferred (as opposed to the SH Match), is there ANY way they can opt for the SH for 2006 now even thought they did not notice the employees back in December? Any assistance/guidance would be greatly appreciated.

These darn pesky clients, you can't educate them and you can't bury them in your back yard and say they went out of business.

[SteveH]

The answer is that it is too late to do a safe harbor plan if the notice was not sent out.

[Tom Poje]

you indicated the plan was a safe-harbor.

it does not matter if a notice was sent or not.

you have a failure to follow the terms of the document by not providing a notice.

the IRS has indicated (at least informally at ASPPA conferences and other conferences) in the case of a SHNEC you could probably self correct and provide a notice ASAP.

again, if the document says the plan is safe harbor, it is safe harbor. failure to provide the 3% would be another failure to follow the terms of the document.

it is not the notice that drives wheter the plan is safe harbor - it is the document. in the case of a 'maybe' safe harbor, it is still not the notice that drives things. it simply imforms the participant.

ok, this type of question keeps popping up. lets try these comments:

(I don't mean these in any negative way. There seems to be an idea that the notice and not the document decides if the plan is safe harbor. this is simply not the case. when safe harbors first came out, many document providers worked under that assumption, and the language implied as much. however, I thought most of them have been corrected.)

American Bar Association Committee on Employee Benefits Q and A May 9, 2003

Company A adopts a safe harbor 401(k) Plan. IRS insists that each year that the safe harbor election is used, the employer must amend the plan to provide that the safe harbor contribution will be employed for that year. Is this correct?

Proposed Response: If the plan contains a default provision, annual amendment to employ the safe harbor is not necessary. The acceptable default provision provides that in any year where the required advance notice that the safe harbor fails to be given, the Plan is subject to the standard ADP test. The employer can file a copy of the safe harbor notice with the form 5500. This procedure cuts down unnecessary paperwork and is consistent with the statute providing for the safe harbor.

IRS Response: The IRS disagrees with the proposed answer. Notice 98-52 requires a notice to participants before the beginning of the year indicating the plan may be amended during the year to provide for a safe harbor nonelective contribution, and Notice 2000-3 provides for some flexibility by providing a supplemental notice to participants and amending the plan to provide for the nonelective contribution by December 1 of the plan year. There is NO DEFAULT OPTION under existing IRS guidance. (Emphasis mine)

OR

What happens if a plan fails to make the safe harbor contribution within 12 months after plan year end? Is it no longer safe harbor and testing must be done?

Answer: No. Plan is still safe harbor, per terms of the document. You have a potentially disqualified plan. Making a ‘corrective’ QNEC per EPCRS (with earnings) seems a reasonable correction.

2002 ASPPA Conference, Q and A #2.

(above 2 comments are comments from IRS representatives. as with any such comments they do not necessarily represent an official position.

OR

this was in the 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.