Safe Harbor - revised for previous year

[Guest jimmybeau]

An owner wants to go back to 2007 plan year and include HCEs in the receipt of the 3% of comp allocation. At the time only the NHCEs received an allocation. Is it possible to do this? Someone said the funds had to be deposited within 12 months of the plan year end? (didn't seem right to me though)

I sure appreciate any help.

Jimmy

[Tom Poje]

the IRS has never really answered the question whether you could make a safe harbor less stringent in its requirements during the year. based on their responses to such questions, I would say they are not wild about permitting this, its like opening Pandora's Box. supposedly the only permissible changes were adding a Roth feature and (if I remember correctly) adding funeral costs for hardships. so at this time I wouldn't recomend it. that does not mean they won't allow it in the future, but at teh moment....

[Guest Sieve]

Non-mandatory plan amendments must be made by the end of the plan year in order to take effect with respect to that plan year. So, you cannot go back and make contributions now for 2007 if the plan document did not allow it at the time. (SH contributions do have to be made within 12 months after the end of the plan year.)

If the plan permitted discretionary PS contributions, then you probably could make contributions now. But those contributions would have to have been made no later than 30 days after the extended due date for filing the employer's 2007 tax return to be considered contributions for 2007--so, if contributions were made now, they would be considered contributions for a different plan year.

[Mike Preston]

Close. The 30-day rule applies to the limitation year under 415, not the allocation year. Hence, assuming the document allowed for a contribution of the sort being mentioned (unlikely, but possible) then a contribution made more than 30 days after the tax return due date would count as a contribution under 415 for the current year (2008) but you would still be able to allocate it to the accounts of participants for 2007.

Of course, this whole thing falls over flat if there is anybody who would receive a contribution for 2007 that doesn't have any compensation for 2008 because then $1 of allocation which is attributable to 2008 for 415 purposes results in a 415 violation.

[WesleyT]

I have a related scenario:

My client didn't yet make his Safe Harbor contribution for the plan year ending 12/31/07. My understanding is that he gets the full 12 months to deposit the contribution and adhere to the safe harbor status (a whole seven days left!). This would allocate the contributions for the 2007 year, but they would be treated as annual additions for 2008. And that even though he can't deduct the contribution for 2007, he could deduct the contribution for 2008.

So, the only thing I would have to worry about is what Mike mentioned about a possibly terminated employee with no 415 compensation for 2008.

Do you guys agree? Thanks for your help!

[Guest Sieve]

One vote for "agree"--except, if the SH contribution was a matching contribution and it was payroll based, then portions of the SH match had to have been contributed quarterly, and the time period has long passed for those quarterly contributions for 2007. (Treas. Reg. Section 1.401(k)-3©(5)(ii).)

[Kevin C]

WesleyT,

Does your document say when employer contributions must be deposited? Most plans I've seen say deposit is required by the due date for the sponsor's tax return, including extensions. If your plan has a similar provision, you have an operational error.

If you are eligible to use it, the IRS's Self Correction Program (SCP) might be helpful. You should still be in the correction window for SCP correction of a significant operational failure. One nice feature of the correction process is that the corrective allocations would be treated as 2007 annual additions. Section 9 of Rev. Proc 2008-50 deals with SCP correction of significant failures.

[WesleyT]

Good call, Kevin. My document does require contributions by the tax return due date. Since all of my participants are affected, it is clearly a significant failure under the Self Correction Program. Unfortunately, this client never applied for a Favorable Letter of Determination, so they are not eligible to use SCP for a significant failure.

Looks like VCP!

[Kevin C]

Are they in a prototype or volume submitter document? If so, you don't need to have a determination letter to be eligible if you have partial reliance on the document's opinion letter.

[WesleyT]

They have a Volume Submitter document, but with an amendment to add New Comparability. So, that technically makes it an Individually Designed plan.

We will be restating their document to a true Volume Submitter document before the end of the required correction period. The rules refer to a current advisory letter. If I finish the correction after restatement, it would be a current advisory letter. But, since the operational failure was clearly related to the prior document, that strategy probably wouldn't hold up.

[Kevin C]

What was the original effective date of the plan? There is a special rule for plans initially adopted or effective after 12/31/2001.

[PAL]

So, if I have an employer that did not put the true-up portion of their 2007 safe-harbor match in until today (the regular match went in each pay period but they had some data issues when resolving the true-up amounts), I'm not totally clear on what the issue's are. Can someone help?

[Kevin C]

PAL,

The language in your document may affect things, but the basic issues are:

1: Operational failure. The plan provisions likely say the full SH contributions are required to be deposited before they were actually deposited. If that is the case, it helps. You will need to read Rev. Proc. 2008-50. Hopefully, you are eligible for the self correction program, SCP. The Rev. Proc. includes sample correction methods.

2. Does the late deposit adversely affect the plan’s SH status? Would they fail ADP/ACP if they apply?

3. 415 concerns. The final deposit is likely beyond the last date that it can be counted as 2007 annual additions. If you use a correction program in Rev. Proc 2008-50, this shouldn’t be an issue.