failure to follow withholding election

[Kimberly S]

Employer set up a new enhanced safe harbor match 401(k) plan in April with a July 31 plan year end. Enrollment forms were distributed and returned in May. With the opportunity to defer in May, June and July, we're good so far.

Payroll person fails to begin withholding for NHCEs until June 30, but does deposit $15,500 each in deferrals for the owner and his wife in May. So HCEs have three months to defer but NHCEs effectively have only one month plus one pay period to make deferrals in the first year of the plan.

I've seen other threads that debate whether or not the EPCRS correction for excluding an employee applies when the employer failed to act on the deferral election. I didn't see any that addressed the safe harbor match that would have been due, had the election been followed. I also didn't see anything relative to the safe harbor requirement that employees have at least 3 months to defer in the first plan year.

The consensus among my co-workers is that the client has not met the safe harbor for this first year and should be subject to ADP/ACP testing, but we aren't able to find anything to support that conclusion.

Any suggestions about where to look?

[austin3515]

The requirement is SOLELY that the plan year be 3 months long, which in your case it is. (1.401(k)(e)(3)). There is no requirement that there be no operational defects for that short 3 month plan year (imagine the whole thing being blown because ONE person had no deferrals withheld! The only difference here is scale).

Therefore, I think your safe harbor is in tact, and you correct this operational defect through EPCRS (which I should point out is no walk in the park--it will be pricey!!).

[Guest fender5150]

I agree with your assessment: They don't have a safe harbor plan for the year in question.

I don't know to what level I would make an issue of it - That's for you to decide. Do you like the company? Is the employer good to work with under most other circumsances?

Your employer's actions are not defendable, but I think I know why he did it. HE's GREEDY! : )

Seriously though; It's hard for an owner to pony up all that money for a safe harbor match. He's funding a portion of your retirment - out of his own pocket - so he can have the privilage of putting some retirement money away for himself.

Strictly speaking however, you may be eligable for the match that you would have received, had you been allowed to participate on the first day this plan feature was added. And I imagine the right lawyer could leverage more than. What the employer did seems clearly improper.

Here's something to get you started - Regarding research:

"The timing requirement requires that the employer must provide notice within a reasonable period before each plan year. This requirement is deemed to be satisfied if the notice is provided to each eligible employee at least 30 days and not more than 90 days before the beginning of each plan year. There are special rules for employees who become eligible after the 90th day. See Income Tax Regulations section 1.401(k)-3(d)(3)."

Thanks,

Fender

401ktest.com

[Guest fender5150]

I think I misread the facts.

If you WERE notified within the proper timeframe, then the HR dept. simply failed to carry out your instructions. However; the fact that they failed to carry out everyone's instructions is an obvious problem for thier position: In my opinion, they still stand to lose thier Safe Harbor status for the first year. But at this point, It's just an opinion.

[Kimberly S]

I don't know to what level I would make an issue of it - That's for you to decide. Do you like the company? Is the employer good to work with under most other circumsances?

Your employer's actions are not defendable, but I think I know why he did it. HE's GREEDY! : )

I'm the employer's TPA, not an employee. My impression is that they aren't greedy, just clueless.

[austin3515]

Fender: Which of the safe harbor requirements was violated?

[Guest fender5150]

I misread the original post.

My original assumption was, the employees were not properly notified of the existance of a plan with a match. My understanding it, It's not a safe harbor plan unless the employees are properly notified. After reading it a second time, it appears the employees were notified, they instructed the HR dept, but the HR dept. didn't act on thier instructions right away.

While this is odd, and it seems like an intentional act; I'm not aware that it violates the requirements for a safe harbor match.