Add Roth feature mid-year to 401(k) safe harbor plan

[Guest STP20004]

My understanding is that the IRS was considering issuing transition guidance back in 2006 regarding adding a roth 401(k) feature mid-year to a safe harbor 401(k) plan. I've looked around but can't find it. Did it ever come out? Also, what is everyone's take on whether I can enhance a match mid-year in a safe harbor plan where the enhancement was not laid out in the annual notice. Thanks!

[John Feldt ERPA CPC QPA]

I don't see a problem with adding Roth, it does not change the info in the Safe Harbor notice or in the Safe Harbor provisions.

Under 1.401(m)-3(f)(1), the plan provisions that satisfy all of these Safe Harbor rules must be adopted before the first day of the plan year and remain in effect for an entire 12-month period. And a plan which includes provisions that satisfy the Safe Harbor requirements will no longer satisfy them if the plan is amended to change such provisions for that plan year.

There are a couple exceptions for a short plan year and the initial year and for the reduction/suspension of the safe harbor match.

That may seem overly strict, but it is what it is.

[Guest STP20004]

The issue stems from the fact that the match for Roth 401(k) contributions would be on top of the 4% match given under the current safe harbor terms. So if I deferred $X after-tax (versus $X pre-tax) I would get the same standard 4% match provided on pre-tax deferrals plus an additional Roth match.... so the effect of adding the Roth feature is that the match is being enhanced or otherwise increased mid-year. This would seem to violate the express language, but seems like an odd result, because I would be giving more, not taking away...

I don't see a problem with adding Roth, it does not change the info in the Safe Harbor notice or in the Safe Harbor provisions.

Under 1.401(m)-3(f)(1), the plan provisions that satisfy all of these Safe Harbor rules must be adopted before the first day of the plan year and remain in effect for an entire 12-month period. And a plan which includes provisions that satisfy the Safe Harbor requirements will no longer satisfy them if the plan is amended to change such provisions for that plan year.

There are a couple exceptions for a short plan year and the initial year and for the reduction/suspension of the safe harbor match.

That may seem overly strict, but it is what it is.

[John Feldt ERPA CPC QPA]

I do not agree with the way you described Roth.

Step #1: The employee decides how much to defer from salary.

Step #2: The employee decides what portion from #1 is pre-tax and the portion that is after-tax

Step #3: The employer provides a match based on the amount deferred under step #1.

I do not see where adding the Roth enhanced the match. Am I missing something here?

[Tom Poje]

at last years Western Benefits Conference the IRS official 'informally' indicated it would probably be possible to add a Roth feature as long as a supplemental safe harbor notice was provided. It was also indicated future guidance would be provided, but I don't recall ever seeing any. At the same time the officials expressed concern if you were to add other features - such as a match, etc. so there ceratinly is no blanket approval for adding anything. In connection with the Roth, they understand the importance of it because it starts the 5 year clock retroactive to the first day of the plan year (just the clock, not a retroactive ability to make Roth contributions), so it does make a difference.

[John Feldt ERPA CPC QPA]

It's now officially okay to add Roth provisions any time during the plan year, even if the plan is a Safe Harbor 401(k) plan.

http://www.irs.gov/pub/irs-drop/a-07-59.pdf

You can also amend a Safe Harbor plan's existing hardship provisions during the year and not lose Safe Harbor status. This would be to allow the plan to treat a participant's beneficiary the same way as a participant's spouse or dependent for purposes of being eligible to receive a hardship distribution. This is an optional provision.