safe harbor - OOPS!

[mphs77]

An Employer established a Safe Harbor (matching) 401(k) Plan in 2004 (it is a calendar year Plan). For 2006, it appears as if not all of the Safe Harbor match was contributed as of October 2008.

My understanding would be that the Plan has an Operational failure for not making the required contribution and another operational failure by not promptly correcting the failed ADP test for 2006.

Thank goodness the Plan is Not Top Heavy so no problems there. No amounts have been distributed since 2006.

The correction to the contribution would be to fund it now, the correction for the ADP failure is the vaunted 1-to-1 correction.

Nothing else is coming to mind for a problem resulting from this error. Any ideas, hints or shots in the dark I might need to look at?

Thanks folks!

[Guest Sieve]

I think it's a pretty straight forward correction process.

However, I don't agree that you are able to fix the problem by correcting for an ADP failure. Carol Gold (who heads the EPCRS program) has stated that a safe harbor plan that fails to timely make the SH contribution will have to correct by making the failed safe harbor contribution, with interest--i.e., that you can't work around a SH contribution just by not making that contribution. (Don't know if that's in the new EPCRS or not, but she stated that position pretty clearly at an ALI-ABA seminar a few months back.)

I would think, however, that the IRS might treat the plan as being required to meet ADP standards if correcting would be more advantageous to the NHCEs than making the SH contribution, so I'd correct by using a "greater of" approach.

[Tom Poje]

I'd go further to say there is no ADP problem to correct. it is safe harbor, the document says so. You have a disqualifying event if not corrected, and that would be nasty.

the preamble to the final 401k regs had the following:

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.

(ok, so I abbreviated the terms SCHENC and SHMAC)

if the plan happened to pass testing without the safe harbor would you argue that you wouldn't need to put in at this late date?

unless the IRS comes out and says otherwise, I'll hold to the fact there is no ADP test even if contributions are late.

[Guest Sieve]

Tom --

If this actually passes ADP without the safe harbor contribution, I would not argue the position you suggest I might. In that situation, I would say--as the IRS has indicated in the preambles you point to and in the seminar I heard--that you'd still have to make the safe harbor contribution (plus interest).

However, if the plan failed ADP without the safe harbor contribution (& it's now more than 12 months after the end of the year), and if an ADP correction would provide more to the NHCEs than a safe harbor contribution (which is unlikely), then I would argue in favor of putting in the higher safe harbor correction contribution. But, I certainly would not be adverse to your position (since, after all, plan provisions have not been followed when the safe harbor contribution is not made).

[BG5150]

...and if an ADP correction would provide more to the NHCEs than a safe harbor contribution (which is unlikely), then I would argue in favor of putting in the higher safe harbor correction contribution.

Since the correction would involve some sort of QNEC, the NHCE's who were not deferring (at least those still employed) would get an allocation which would be more than the zero SHMAC they would get otherwise.