Safe Harbor Plan

[John Feldt ERPA CPC QPA]

A client (about a hundred employees) wants to allow participants to defer into the plan earlier. This affects no HCEs and does not affect any testing (the employer contributions do not need 401(a)(4) testing due to the design). The plan is not even close to top heavy.

However, the plan is a calendar year safe harbor plan. Currently the eligibility for deferrals and matching are the same (one year, age 21, semi-annual entry). Starting September 1, they want to allow recent hires to defer after 6 months, age 21 with monthly entry dates for deferrals with no changes to the eligibility requirements for safe harbor contributions. They currently foresee no HCEs ever being in this early group, so the "Otherwise Excludable" rule makes that group okay (as far as I can tell).

I know the IRS received comments regarding the types of changes (amendments) that should be alright to do mid-year for a safe harbor plan.

Any problems with doing the above? Any grapevine comments from the IRS about allowable mid-year SH plan amendments?

[Bill Presson]

A client (about a hundred employees) wants to allow participants to defer into the plan earlier. This affects no HCEs and does not affect any testing (the employer contributions do not need 401(a)(4) testing due to the design). The plan is not even close to top heavy.

However, the plan is a calendar year safe harbor plan. Currently the eligibility for deferrals and matching are the same (one year, age 21, semi-annual entry). Starting September 1, they want to allow recent hires to defer after 6 months, age 21 with monthly entry dates for deferrals with no changes to the eligibility requirements for safe harbor contributions. They currently foresee no HCEs ever being in this early group, so the "Otherwise Excludable" rule makes that group okay (as far as I can tell).

I know the IRS received comments regarding the types of changes (amendments) that should be alright to do mid-year for a safe harbor plan.

Any problems with doing the above? Any grapevine comments from the IRS about allowable mid-year SH plan amendments?

We did this almost exactly as you describe last year. All our external attorneys blessed it.

[Kevin C]

Will you need to amend the plan's safe harbor provisions so that the otherwise excludables don't receive the safe harbor contribution? If so, I would want an ERISA attorney's opinion before amending. We don't know how literally the 1.401(k)-3(e)(1) prohibition on amending safe harbor provisions during the year will be enforced.

[John Feldt ERPA CPC QPA]

No. The eligibility for the safe harbor would remain unchanged at age 21, 1year, semiannual entry.

[Kevin C]

Do the safe harbor provisions currently say age 21, 1 yr and semi annual entry? Or, does it say that those eligible to defer receive the safe harbor contribution? If it is the latter and you change deferral eligibility, then you would have to amend the safe harbor provisions to keep age 21, 1 yr and semi annual entry for the safe harbor contribution.

Is it considered an amendment to the safe harbor provisions under the regs if it changes the plan language, but keeps the safe harbor eligibility requirements the same?

[John Feldt ERPA CPC QPA]

Do the safe harbor provisions currently say age 21, 1 yr and semi annual entry?

Yes, so it is not the latter, but the former. The safe harbor eligibility provisions are not tied to any of the deferral eligibility/entry dates.

Is it considered an amendment to the safe harbor provisions under the regs if it changes the plan language, but keeps the safe harbor eligibility requirements the same?

If if does not affect the decision to defer (like adding a match or removing a match), then I'd say "maybe", but I'm in really in the "probably not" group.

[Kevin C]

I think you are OK with the change.

There still seems to be some disagreement about what kind of changes can be made in safe harbor plans during the plan year. Personally, I think the 401(k) regs are pretty clear that the amendment restriction applies only to safe harbor provisions. It would be nice if the IRS would let us know how literally they interpret that provision, but I won't hold my breath.

Our GUST prototypes tie the safe harbor contribution to deferral eligibility so that is what I'm used to seeing.

[justatester]

If you did have a HCE is the "otherwise" exculdable group (those under 21/yos), would testing be required? If yes, which I think is the case, who would be tested? For example, suppose you have a participant who was hired on 8/15/07 and earned $150,000 for the rest of 2007. The participant is immediately eligible to defer for pretax. However, the Safe Harbor Matching provision has 1 yos/age 21, monthly entry. The participant is eligible to start receiving the SH match on 9/1/08. For the 2008 test, he would be considered a HCE. How would you "test" the "otherwise excludable group"? Would this person be in the "otherwise excludable" group or in the main group since he is receiving a SH match as of 9/1/2008?

Any thoughts/direction would be appreciated!