Safe Harbor Plan

[Guest Sieve]

How about this (which I do not think we've yet discussed, believe it or not) . . .

Employer selects NEC as the SH contribution (in prototype document), and selects that ALL employees will receive the SH contribution. Employer, in mid-year, wants to eliminate the SH alllocation for HCEs on a prosective basis.

Since, in order to comply with SH regs, only NHCEs need to receive the SH contribution, and the HCE SH allocation is therefore not part of the plan's SH provisions, I think that you can make the prospective change the employer wants in this case without violating the 12-month rule of Treas. Reg. Section 1.401(k)-3(e)(1).

Thoughts?

[Bird]

I think you're right.

[J Simmons]

The closest I recall to discussing something like this would be whether mid-year a SH match can be reduced to the minimum needed to keep the SH. A literal reading of the regulation suggested that it would blow the SH for the year and ADP would rear its ugly head. I think that was noted by Kevin C.

I think you make a very logical argument. Basically, the SH NEC for the HCEs was extra, above and beyond what is needed to be SH, so its elimination mid-year ought not disqualify the plan from SH for the year.

As the IRS is silent in the regs on stopping SH NEC mid-year though having addressed how SH Match may be, you'd be taking a risk, albeit using logic.

[Kevin C]

Sieve,

It's the next sentence of 1.410(k)-3(e)(1) that causes a problem for you.

In addition, except as provided in paragraph (g) of this section, a plan which includes provisions that satisfy the rules of this section will not satisfy the requirements of § 1.401(k)-1(b) if it is amended to change such provisions for that plan year.

It would be nice if we would get some additional guidance about this, but I'm not hopeful that we will get anything useful. So far, all we have is guidance that adding Roth deferrals and hardship distributions mid year are ok. I read the reg as saying you can not amend the safe harbor provisions during the year. Roth and hardships are not safe harbor provisions, so I didn't see anything useful in that guidance.

I do find it interesting that there have been discussions here about whether or not you can change deferral eligibility provisions or the PS allocation method in a SH plan during the year. My opinion is that those are allowed. Then, we have other discussions about whether a safe harbor provision that goes beyond the minimum requirements to have a SH plan can be changed. My opinion is that it is not allowed. Others have different opinions. In the end, it depends on how you interpret the language of the regulations.

[Guest Sieve]

Kevin --

Thanks for your thoughts. Here is a bit more detailed analysis of my position . . .

Do you agree that what is forbidden by the sentence you quote is an amendment to "such" provisions, i.e. an amendment to "provisions that satisfy the rules of this section"? If so, then I would note that the section referred to in that sentence is Treas. Reg. Section 1.401(k)-3, and the amendment I suggest (eliminating HCEs from the NEC SH contribution) does not revise any provisions that satisfy the -3 regs (in the same way that hardships, Roths, eligibility or PS--all revisions that you agree are permitted--also do not revise any -3 provisions). And, if the amendment does not change "such" provisions, it ought to be permitted because -3(e) does not forbid it.

Your further thoughts would be appreciated.

And, yes, regulatory interpretation is the name of the game. I wish better guidance were the name of the game, too . . .

[Kimberly S]

Would it not also be a cut back issue, since any HCE who has worked during the year has alreay earned the right to that benefit?

[Kevin C]

Do you agree that what is forbidden by the sentence you quote is an amendment to "such" provisions, i.e. an amendment to "provisions that satisfy the rules of this section"?

Yes, I interpret it the same way. It prohibits any amendment to "such provisions"

If so, then I would note that the section referred to in that sentence is Treas. Reg. Section 1.401(k)-3,

I still agree with you.

and the amendment I suggest (eliminating HCEs from the NEC SH contribution) does not revise any provisions that satisfy the -3 regs (in the same way that hardships, Roths, eligibility or PS--all revisions that you agree are permitted--also do not revise any -3 provisions).

This is where I disagree. You say "eliminating HCEs from the NEC SH contribution". I see that in two parts. First the HCE's are currently receiving the NEC SH contribution. The NEC SH contribution is definitely a provision satisfying 1.401(k)-3. Who receives the NEC SH contribution is a part of that provision. Second, you want to amend the NEC SH provision. But, the reg says you can't amend the NEC SH provision. It doesn't say you can't amend unless the provisions satisfy -3 after the amendment.

I have a question for you. With the plan as it currently is, if they only contribute the NEC SH contribution for the year, do they qualify for the section 416(g)(4)(H) top heavy exemption? Before you answer, consider that you are arguing that the NEC SH contribution going to the HCE's is not a provision that satisfies 1.401(k)-3. I see that the same as arguing that it does not meet the requirements of 401(k)(12).

[austin3515]

I agree with KEvin C, cuz we went down the exact same question and gave the client the exact same answer.

Not to change the subject too much, but REALLY bothers me is that you can't discontinue the SHNEC mid year. I think it's obscene that a company cannot control its expenses on a PROSPECTIVE basis. I've some simple projections and determined that A LOT of plans will be needlessly terminated this year as the sole means of controlling a substantial cost. Perhaps when regulators realize this, they'll make change this idiotic prohibition.

I sent this email to Brian Graff of ASPPA, but haven't heard back yet (I'm not holding my breath!). Maybe if he gets several copies of the same email, he'll respond on these boards!!!

Brian –

Has there been any discussion regarding the prohibition of discontinuing a 3% Safe Harbor Nonelective contribution mid-year, similar to the rules regarding discontinuing safe harbor matching contributions?

It would seem that absent a change, many hundreds of retirement plans will be needlessly terminated as this is the only way to limit a very significant expense. And of course, such a termination will result in the depletion of retirement savings for thousands of individuals who will likely decide to cash-out their balances in lieu of rolling over their contributions to an IRA due to the economic climate. Furthermore, a new replacement plan cannot be installed for at least one year which would mean that the employees lose a year of retirement savings, at a minimum.

[K2retire]

ASPPA has already sent comments to Congress about this. I believe I read it in an e-newsletter last week, although I don't recall if it was from Benefit Link or Plan Sponsor.

The bigger question is if they can act soon enough. With nothing definitive on the horizon plans will continue to be terminated.

[Guest Sieve]

Kimberly -- I think, because the SH contribution is defined as a specific percentage of compensation, that the contribution can be prospectively ended in spite of the anti-cutback rules. If it were a discretionary contribution, then the allocation formula with regard to that contribution could not be changed because the right to the allocation formula will have been earned for any discretionary contribution not yet made. (I have come to accept the full-year allocation formula anti-cutback rule for a discretionary employer contribution, but I don't think it applies if a specifically delineated contribution is prospectively terminated.)

Kevin -- Thanks for the detailed discussion. I appreciate your position and the clarity of your argument, and I thank you for causing me to better flush out my own position. However (and you knew that was coming!!), in my mind it is not a given that "[t]he NEC SH contribution is definitely a provision satisfying" the -3 regs, nor that the totality of "who receives the SH contribution" is a part of the -3 provisions. Rather, it is only that portion of the SH NEC that goes to NHCEs that satisfies -3, since there is no requirement in -3 that HCEs must receive the SH NEC in order for the provisions of -3 to be satisfied. Therefore, since satisfaction of -3 does not require HCE coverage, then HCE SH NEC eligibility can be changed (eliminated or added, I would suggest) without impacting satisfaction of -3 in any way. So, -3 satisfaction is not occurring to the extent that those eligible for the SH NEC exceed the -3 requirement of covering NHCEs.

That being said, my world (such as it is!) was rocked when I considered your question of whether there would be a TH free pass if the SH NEC went to NHCEs and HCEs. You suggested that my position--that the HCE allocation as part of a SH NEC is not a provision satisfying SH NEC--would, by definition, mean that the HCE NEC makes the plan ineligible for the TH exemption of IRC Section 416(g)(4)(H) because the plan no longer would "meet the requirements" of a SH plan (due to the extra allocation to the HCEs). Try as I might, I don't have a good answer to that--except the flippant answer that if it's a SH NEC, then it automatically will meet TH under all circumstances (but that argument will not hold for a SH match). In fact, when I went back to the regs, and re-read them over & over, I found that the Plan in Examples 1 and 2 in reg -3©(7) "satisfies the safe harbor contribution requirement" of the regs even though both NHCEs and HCEs received the SH contribution. It shows me that a consistent use of the word "satisfy" in the regs, both in the -3©(7) examples & in -3(e)(1), means that my analysis is probably off-base and that your analysis is probably correct.

So, I've pretty much moved over to your dark side. A literal--and proper--reading of the regs leads me to conclude that a SH NEC to HCEs cannot be eliminated in mid-year.

[austin3515]

Sieve -

From ERISA Outline Book:

2.c.3)Plans providing safe harbor nonelective contribution may not discontinue safe harbor contribution before the close of the year unless arrangement is terminating.

For what its worth, I agree it would not be a cutback, but alas it is not permissible. The basis for suspending the match is in Treas. Reg. §1.401(k)-3(g) and there is no corresponding "out" for SHEC plan's.

From Treas. Reg. §1.401(k)-3(e)

"In addition, except as provided in paragraph (g) of this section, a plan which includes provisions that satisfy the rules of this section will not satisfy the requirements of §1.401(k)–1(b) if it is amended to change such provisions for that plan year. "

The title of that paragraph is "(b) Coverage and nondiscrimination requirements" and INCLUDES the ADP test. So if you amend the plan (except as provided in (g) regarding suspending the SH match) the plan CANNOT pass nondiscrimination.

And that (I believe) is the basis for Sal's conclusion.

[Kevin C]

Sieve,

Actually, my argument on the TH exemption keys on the phrase "... which consists solely of ...". You were arguing that the HCE portion of the NEC SH contribution does not satisfy 1.401(k)-3. To me, that means you are saying you have something in the plan other than a SH CODA and the SH contribution.

If you still want to try the change, I wonder how this approach would work? The amendment results in the plan failing to satisfy a qualification requirement. The plan document is now the qualification issue. Plan document failures can be corrected under VCP. Of course, the IRS could just say the correction is to retroactively undo the amendment.

[austin3515]

http://www.asppa.org/pdf_files/govpdffiles...r.Unsol.FIN.pdf

Thanks K2 Retire - I went out and found the letter... Looks like they were all over this...

[Guest Sieve]

How about this approach?

As I was reading the ASPPA letter provided by austin, it indicated that "[t]he only recourse for an employer that cannot afford to continue the 3 percent nonelective contributions for the entire year is to termiante the plan." But that's not really true. Why can't the plan change its plan year, eliminating the NEC at the end of the short plan year and starting a new SH contribution (NEC for only NHCEs, or match for all, or match just for NHCEs) for a new 12-month plan year? The regs permit a change of plan year as an exception to the 12-month year rule for SH contributions, so long as there was a full 12-month SH year both before & a full 12-month SH year after the short plan year. (Treas. reg. Section 1.401(k)-3©(3).)

Why wouldn't that work?

[austin3515]

(3) Change of plan year. A plan that has a short plan year as a result of changing its plan year will not fail to satisfy the requirements of paragraph (e)(1) of this section merely because the plan year has less than 12 months, provided that—

(i) The plan satisfied the requirements of this section for the immediately preceding plan year; and

(ii) The plan satisfies the requirements of this section (determined without regard to paragraph (g) of this section) for the immediately following plan year (or for the immediately following 12 months if the immediately following plan year is less than 12 months).

[Guest Sieve]

austin -- What are you saying? Are you suggesting that the language about ignoring -3(g) means that you must retain the SH provisions from the short plan year into the new 12-month plan year--i.e., that the SH NEC for HCEs could not immediately be eliminated?

[austin3515]

I think I was just saying that you can't simply amend the plan year to get rid of your 3% SHNEC effective immediately (or even oin 30 days).

After my bolded sentence in the regs, you still think your solution would work? Because it quite clearly seems to be out based on that sentence?

[Guest Sieve]

Let me ask you this (thinking I know the answer, but not sure): What is it, exactly, in -3(e)(3)(ii) that you believe would prohibit ending the curent plan year as of April 30 (for a short plan year of 1/1 - 4/30), making all the necessary SH NEC contributions through 4/30 that are called for in the document, and then providing a 3% NEC SH contribution for NHCEs for the new 12-month SH plan year commencing 5/1/2009 (if that new SH plan year continues unchanged until 4/30/2010)?

[Kevin C]

Austin,

I have to agree with Sieve on this one. It seems a lot of trouble to go to, but it should work. The preamble to the final 401(k) regs has a paragraph with an explanation of the section you quoted.

In addition, a safe harbor plan could have a short plan year if it is preceded and followed by plan years as a section 401(k) safe harbor plan. Under these final regulations, the following plan year is permitted to be shorter than 12 months if the short plan year is as a result of a plan termination (whether or not the plan termination is in connection with a merger or acquisition involving the employer). These final regulations clarify that this treatment is unavailable if in the following plan year safe harbor matching contributions are reduced or suspended. In the event that the short plan year is followed by another short plan year, this treatment is available if the plan satisfies the 401(k) safe harbor requirements for the 12 month period immediately following the first short plan year.

Sieve,

If the client wants it bad enough to do a short plan year and obligate themselves now to being SH 401(k) for another year to keep the SH for the short year, it should work. I don't see anything that prevents you from changing the SH provisions at the beginning of the following year. You just have to be 401(k) SH in the following year.

[John Feldt ERPA CPC QPA]

But since you are required to be SH for the entire next 12-month plan year, after the short year, you have now committed SH for another 12 more months (albeit maybe as a SH match or as a NEC for NHCEs only).

If the Employer can't afford 3% now, it is unlikely that they would want to commit to 12 more months starting from now (instead of just terminating) even with those slight changes to who gets the SH.

[Guest Sieve]

Kevin --

Sorry you had to agree with me . . . !! Since it's the HCE 3% that is the issue, the only reason I think the employer would opt for a short plan year would be to prevent termination of the plan, since I fear that termination and establishment of a new 401(k) in a short period of time would be a "form over substance" issue for the IRS, and the plan termination would not be permitted (& thus the change of SH contribution would not be valid).

But, let me ask you what you make of the language you quoted from the preamble--"These final regulations clarify that this treatment is unavailable if in the following plan year safe harbor matching contributions are reduced or suspended"? Or the parenthetical from -3(e)(2)(ii) that says "(determined without regard to paragraph (g) eof this section)"?

Do you think that language means that you are not permitted to reduce or suspend the SH contribution between the short plan year & new plan year (i.e., does it mean that you must have the identical SH provisions in the new 12-month plan year as in the short plan year)? Or does it just mean that you are not permitted to change the SH contributions DURING the new 12-month plan year pursuant to -3(g) in order for the short plan year to be permitted?--i.e., -3(g) is treated as simply not existing during the next 12-month plan year. I opt for the latter interpretation.

[austin3515]

For the second time today I was guilty of not reading the entire post. I'll try to do better... I was focused on the fact that there is no way to discontinue it altogether.

I TOO agree with Sieve, though it would concern me if the sole reason for the plan year change was to reduce and/or amend the 3% SHNEC which the regulations clearly are seeking to avoid. So I think this would make me nervous about those catch-all rules (don't interpret the rules in a way contrary to the spirit of the rules)... Particulalry if you opted for the match instead of the 3% SHNEC.

[Guest Sieve]

austin --

Good point. You're probably talking about the anti-abuse rule of Treas. Reg. Section 1.401(k)-1(b)(3). That is aimed at controlling actions which either distort or manipulate the HCE ADP or artifically increase the NHCE ADP, but I don't think any of that is happening here.