late safe harbor notice

[Tom Poje]

In case you are a 'fool' and don't subscribe to such things: This is quite good, its the first explanation I've seen for a failure involving a safe harbor match. subscription is free http://www.irs.gov/retirement/content/0,,id=154836,00.html

Fall 2008 edition IRS Retirement News for Retirement Plans

Fixing Common Plan Mistakes:

Failure to Provide a Safe Harbor 401(k) Plan Notice

Each issue of the RNE looks at a common error that occurs in retirement plans and provides information on fixing the problem and lessening the probability of its recurrence.

Background:

A safe harbor 401(k) plan requires the employer to provide:

• timely notice to eligible employees informing them of their rights and obligations under the plan and

• certain minimum benefits to eligible employees either in the form of matching or nonelective contributions.

The employer should provide the rights and obligations notice within a reasonable period before the beginning of each plan year (or in the year an employee becomes eligible, within a reasonable period before the employee becomes eligible). In general, the law considers notices timely if the employer gives them to employees at least 30 days (and no more than 90 days) before the beginning of each plan year. The notice must include, at a minimum, details on:

• whether the employer will make matching or nonelective

contributions, • other contributions under the terms of the plan,

• the plan to which the safe harbor contributions are made, if more than one plan,

• the type and amount of compensation that may be deferred under the plan,

• how to make cash or deferred elections,

• the specific time periods available under the plan to make cash or deferred elections,

• withdrawal and vesting provisions for plan contributions, and

• how to easily obtain additional information about the plan (including a copy of the summary plan description).

The Problem:

Rainbow Company established a safe harbor 401(k) plan in 2005. The plan provides for matching contributions in an amount equal to: 100% of elective contributions up to 3% of the employee’s compensation plus 50% of elective contributions greater than 3%, but not more than 5% of the employee’s compensation. Eligible employees received timely notices in 2004, 2005, and 2006. However, in 2007 Rainbow failed to provide safe harbor notice to its employees. In addition, Rainbow did not furnish notices to employees who became eligible to participate in the plan in 2008. Rainbow discovered the problem when it conducted an internal review of its plan operations at the end of 2008.

Violet first became eligible to participate in the plan on January 1, 2008. She did not receive notice and Rainbow did not inform her of her right to make elective contributions to the plan. She earned $20,000 in compensation in 2008.

Indigo has been a participant in the plan since 2005. She has made elective contributions of 2% of compensation each year, after receiving notices in 2004, 2005, and 2006. While she did not receive a notice in 2007, the human resource department (HR) informed her that the employer’s matching contribution formula will remain the same for 2008 and that she should inform HR if she wanted to make any changes to her elective contributions for 2008.

Finding the Mistake:

In order to find the mistake, review:

• The deferral decisions among eligible employees. If many eligible employees are either not making elective contributions or deferring at low rates, it is possible that they did not have timely access to the information contained in the notice.

• The plan’s procedures for issuing notices.

• The plan’s records showing that the employer followed the plan’s procedures relating to the distribution of notices.

Fixing the Mistake:

Rainbow must evaluate the impact of its failure to provide notice to its eligible employees. The solution might be different for each affected employee. As illustrated in this problem, the failure to provide notice could require correction for the exclusion of an eligible employee or a simple revision to an administrative procedure.

Exclusion of an eligible employee. Violet belongs in this category. Due to its failure to provide notice, Rainbow did not inform Violet of her ability to make an elective contribution when she was eligible. To correct the failure, Rainbow must make a corrective contribution for Violet to replace her missed deferral opportunity and the missed matching contributions that occurred because Rainbow improperly excluded her from the plan. The corrective contributions are determined as follows:

(a) Missed deferral opportunity: If an employee is not provided with the opportunity to elect and make elective deferrals to a safe harbor §401(k) plan that uses a rate of matching contributions to satisfy the safe harbor requirements of §401(k)(12), then the missed deferral is deemed equal to the greater of 3% of compensation or the maximum deferral percentage for which the employer provides a matching contribution rate that is at least as favorable as 100% of the elective deferral made by the employee. Violet’s missed deferral is 3% of her compensation of $20,000, or $600. Violet’s missed deferral opportunity is 50% of her missed deferral of $600, or $300. Rainbow needs to make a corrective contribution to replace Violet’s missed opportunity to make elective contributions of $300 (adjusted for earnings).

(b) Missed matching contribution: If Violet made an elective deferral of $600, she would have received an employer matching contribution of $600. Rainbow needs to make a corrective contribution to replace the missed matching contribution of $600 (adjusted for earnings).

Fixing an administrative problem. Indigo belongs in this category. The failure to provide notice did not prevent her from making an informed timely election to change (or maintain) her elective contribution to the plan. No corrective contribution for Indigo is required. The plan needs to reform its procedures to ensure that she receives timely notices in the future.

[Below Ground]

I always wonder how, as a TPA, you can confirm that a client actaully distributes the Notice you provide to them. Anyone have any ideas on how to address the potential of a client not distributing the Notice to participants?

[JanetM]

I agree below ground. Back in the day I was on TPA side. I would give my doctors, dentists, and lawyers the SAR to hand out and they would smile politely and nod. Then they would either file it away and not share the information or give out the notice with altered numbers.

One doctor told me this. The office has 6 people, me and five others. I show them this and all moral goes down. They know their balance, it would be easy to figure out mine. No way am I giving that out.

[Guest Sieve]

This may be a hint of an approach the IRS is considering for the next EPCRS. Not giving a timely safe harbor notice is one of the failures for which the IRS requested input at the beginning of the latest EPCRS.

[K2retire]

I always wonder how, as a TPA, you can confirm that a client actaully distributes the Notice you provide to them. Anyone have any ideas on how to address the potential of a client not distributing the Notice to participants?

When I worked for a full service TPA, we sent the safe harbor notice to the plan sponsor in advance of each entry date along with a confirmation for them to sign indicating the date on which they distributed the notice. We followed up on all outstanding notices until they were received.

There's no way to guaranty that the client didn't lie, but at least we could prove that an effort was made.

[Guest Sieve]

Unfortunately, on a practical level, there is no more ability for a TPA to determine if the SH Notice was distributed timely (or at all) than there is to know whether a Notice to Interested Parties was posted/distributed (except that is listed on the Form 5310, which is signed under penalty of perjury), or whether a Notice of Intent to Terminate was distributed (although, again, I think that appears on PBGC Form 500), or whether an SPD was distributed, or whether 401(k) deferral election forms were distibuted (as part of a SH plan), or whethere any other notice for participants was distributed timely and properly.

All you can do is request that it be done, and then follow up like K2 indicates--and, just as importantly, point out the potential consequences of the error and what the fix should be. I don't know that TPAs need to be the ERISA police at this point in time, although they certainly need to give the proper message: "X is required, so you must either do it properly or else fix it in the following manner".

Here's a partial solution that might work, and will hold the employers' feet to the fire: why not just add the question "Was the SH Notice for the following year timely distributed?" on the written information/data request that is made each year in preparation for completing the Form 5500? Perhaps, also, "Was an SPD distributed to new participants?", and "Was the SMM for any amendment during the year properly distributed?', and "Was the SAR distributed timely?". At a minimum, the employer ought to start understanding the importance of those acts by being continually asked the questions.

Of course, if the answer is "no" then the TPA has an obligation not to ignore the response, but to follow-up with more information re: the consequences and the fix.

I learned long ago that you should never ask a question unless you are willing to deal with the consequences of the answer--so, don't ask the employer if they've done something unless you are willing to properly follow-up (rather than ignore) an "incorrect" answer.

The real issue, therefore, is not just bugging the client for the answer, but also letting them know the consequences when the answer is not the proper one, and--what is more difficult for some TPAs--suggesting the proper fix when necessary (e.g., you need to make an elective contribution for those who did not receive a deferral election form).

For example, I think there were many TPAs who knew their small employer clients were violating the plan asset regs by making deferral payments to the trust only once a month, but they did very little (if anything) to try to convince the employer that contributions needed to be made any quicker (or even to disabuse the clients from believing that once a month was sufficient), and even fewer suggested that the employer undertake a proper fix.

I think it's the obligation of all service providers to protect our clients from their own ignorance and from their own (understandable) lack of concern by continuing to alert them to the importance of these issues and letting them know that their errors should be fixed.

Thank you for listening to your Sunday sermon a day in advance (or a day late, for those not on line until Monday) . . .

[Tom Poje]

In the case of a SHNEC I do not think the issue is as bad as in the case of providing some type of safe harbor match.

It is in the employer's own interest to have something on record if someone chooses not to defer, otherwise an employee could go to the DOL and claim they never knew about getting a match -we all know they 'would have deferred' if they had known about it.

[Below Ground]

I really appreciate the comments. Just for the "record", I send each client a letter saying that processing assumed use of the Notice in a timely fashion. I also detail what would happen if this was not the case. I see the logic with the follow-up, but would be concerned that the client would get angry/annoyed if followup was more than once. Afterall, they can read, can't they? While this is somewhat rhetorical, it does demonstrate the problem I see.

[WDIK]

but would be concerned that the client would get angry/annoyed if followup was more than once.

They very well might, but, in my opinion, it is even more likely that they would get angry/annoyed at the possible results of their inaction.

Afterall, they can read, can't they?

Sometimes I wonder.

[Tom Poje]

O GR8. next U tell me eye have 2 provide notice n text message 4mat.

[Below Ground]

WDIK, I agree with the implications of your post. My point was like the old adage of you can take the horse to water, but you can't make it drink. We tell clients the potential consequences in written and verbal form, but how can you tell whether they did what was expected? It is, afterall, their plan and the TPA can't penalize or sanction a client. We can, however, be fired if the client thinks we are too "pushy".

As example, I had a client that we were always concerned about the filing of Form 5500. The filing is sent to the client under a "no nonsense letter" saying sign, date and mail. (Signature lines even have flags.) This goes out in April to this firm. Then, when we check in June the filing status on the DOL's service line, we find it not coded as being processed. This starts our sending faxes and emails, and making calls saying don't forget to send the filing in. This became an "annual pattern" with this client.

This worked for a number of years, but did not for 2006. Why? I can't say. I can say that the records showed repeated contact saying sign, date and mail in. Regardless, for 2006 this client did not because "something came up in the end of July".

Since we were already "nervous" about this client, we actually filed a 5558 Extenstion before 7/31. We then mailed a new filing to the client saying that if the July 31 Deadline was not met, use this filing before October 15th.

Okay so far, especially since the DOL still indicated that the filing was not done when we checked in September. So, again we start with the calls, emails and faxes.

Did this work? Nope. In fact, when the IRS said the filing was never made this client wanted to say it was our fault. After I sent their lawyer copies of documentation, our next communication was a letter terminating our service. Why? Because the client thought our approach was too pushy!

We suggest the DFVC since the letter was from the IRS. We even offered this service to them, but was told that the $750 reduced penalty was too high.

The moral of the story in my opinion is that you can only do your best to guide the client. However, since you are not the client, be sure that records show you tried to have the client do the right thing. Oh yeah, and some clients just aren't worth having.

[WDIK]

As the saying goes, "You are preaching to the choir."

[GMK]

For the record, some (probably most) of us appreciate all the conscientious help, reminders, notices, hand holding, etc. we can get.

Thanks to all of you. Keep up the good work.

[BG5150]

You do your 5500's in APRIL? Geez, by then, I'm lucky to have census data back from half my plans in order to do testing...

[Below Ground]

We are very proactive on data collection. In fact, some say we are too "pushy" on this topic... Still, I do know what you mean.

[Kevin C]

I don't see the article as saying the SH notice really makes much difference in these two situations. In the first example, Violet did not receive the SH notice AND she is improperly denied the opportunity to make salary deferrals.

Violet first became eligible to participate in the plan on January 1, 2008. She did not receive notice and Rainbow did not inform her of her right to make elective contributions to the plan.

The correction for Violet is the same as the correction under Rev. Proc. 2008-50 for someone who is improperly excluded from a plan that uses the SH match. It looks like the improper exclusion is the reason for the corrective contribution, not the missed SH notice.

In the second example, Indigo was already deferring, received prior SH notices and was told the SH match continued to apply. The only corrective action is to give her the missed notice and revise the procedure for providing the notice.

If the new participant received enrollment forms and a copy of the SPD when they became eligible, but not the SH Notice, I hope it would be the administrative correction like for Indigo. It sure would have been nice to have more examples in the article.