Failed to amend plan after safe harbor maybe notice

[Guest long]

Company issued the "maybe" safe harbor notices every year since 2003 and always funded the 3% safe harbor nonelective contribution by year end. But but they failed to amend 401(k) plan to state they were making a 3% nonelective contribution and never sent employees a supplemental notice. Do you agree the employer cannot self-correct and must correct via VCP-approved retroactive amendment?

[J Simmons]

I think that ADP testing applies to those years, and you may need to make QNECs to correct. See Rev Proc 2008-50, section 4.05 and Appendix B, section 2.07.

As for the 3% contribution that was made, its true nature is likely that of a discretionary profit sharing contribution. You need to re-examine it for each year, along with any other discretionary profit sharing contributions to make sure it is not discriminatory and has overall allocation in accordance with the terms of the plan for allocating such contributions.

Also, if the discretionary profit sharing contributions are subject to vesting and any of what were believed to be "3% safe harbor" contributions were distributed, the ER might need to make additional contributions equal to the amounts that would have been forfeitures if those distributees will not voluntarily return the amounts that were, it turns out, not vested.