Safe Harbor plan language

[J Simmons]

IRS National Office issued a favorable opinion letter for 401k prototype (EGTRRA version) that provides:

"If section X of the Adoption Agreement indicates that the 401k Safe Harbor applies, then for a Plan Year as to which a timely 401k Safe Harbor Notice is provided to each Participant, the Plan is treated as meeting the requirements of IRC section 401(k)(3)(A)(ii). If section X of the Adoption Agreement indicates that the 401k Safe Harbor does not apply, or no 401k Safe Harbor Notice is timely posted for a Plan Year, then the 401k Safe Harbor does not apply to the Plan Year."

This is different than the more common language in other prototypes that read in essence that the plan is for a plan year a 401k safe harbor if the adoption agreement provides, not hinging also on whether a 401k safe harbor notice was in fact timely provided for the plan year.

I'm interested in what comments there might be for toggling in and out of 401k safe harbor plan year to plan year solely on the basis of a timely 401k safe harbor notice (or not) for the plan year, if the plan adopts the prototype with the language quoted 2 paragraphs and does not 'amend' from year to year.

Perhaps asked another way, do those that have heard the unofficial comments of IRS representatives that there need also be an amendment think that such applies to all 401k safe harbor plans or just those that use the more common language?

[EDIT: typo]

[Jim Chad]

This is interesting. One thought about this refers to planning on being SH and failing to pass out the notice. With my doc I have a blown Safe Harbor Plan and have to go through EPCRS. With this doc you simply have a non-SH Plan that year.

[Tom Poje]

the preamble to the final regs clearly says:

"Additionally, a plan that uses the safe harbor method must specify whether the safe

harbor contribution will be the nonelective safe harbor contribution or the matching safe

harbor contribution 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 employees 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.

Accordingly, if, at the beginning of the plan year, a plan contains an allocation formula that

includes safe harbor matching or nonelective contributions, these regulations clarify that,

except to the extent permitted under §1.401(k)-3 and §1.401(m)-3, the plan may not be

amended to revert to testing for the plan year."

one of the requirements for a safe haror is to issue a notice, thus I don't see how such document language is possible ..e.g. you are reverting to ADP testing. It is certainly possible the IRS missed something in a prototype review or they read it to mean something else. The language you cited sounds like the language that was in documents when safe habros first came out, but since then I thought all such language was done away with.

of course I could be wrong.

[J Simmons]

Thanks, Jim and Tom.

There's always seemed something not quite right with that preamble statement or at least the secondary interpretation of it that Tom no doubt accurately relays (as the preambles are merely some level of interpretation of the regulations themselves).

It would seem that there are three requirements for safe harbor for a plan year: (1) plan language that the safe harbor applies and whether the required contribution will be match or non-elective, (2) a timely safe harbor notice provided to employees before the plan year begins, and (3) the employer makes the contribution.

To give efficacy to the notice requirement, it is understandable that a plan would not be permitted to provide that the ADP will apply to a year for which a notice is given but then no contribution actually made, i.e. the contribution being a requirement of the safe harbor. A notice could be given before the year begins, but then later if it looks like the ADP would pass (or pass with a QNEC, for example, less than the safe harbor contribution described in the notice) the employer simply doesn't make the contribution. (Albeit there being Title I issues separate from the tax regs.)

To safe harbor or not is to be decided before a plan year begins, and the employer not to have wiggle room after that to get out of its decision for that year.

The broader interpretation that 'requirements for the safe harbor' mentioned in the preamble go beyond making the contribution promised in a safe harbor notice given and includes the requirement of the safe harbor notice itself serves what functional purpose? In such a plan, for the ADP to apply to a year, the employer has not given the notice, not promised the contribution, and has thereby committed to the ADP applying before the plan year even began. Nor are employees misled by language in the plan that says that safe harbor only applies to plan years that the notice is timely given.

And if the 'requirements of the safe harbor' is interpreted beyond the actual making of that contribution when it has been noticed up, what prevents that clause of the preamble from reaching even the safe harbor requirement that a plan document specify that it is safe harbor? If so interpreted, then no 401k plan could specify how the ADP rules will apply and be satisfied. A non-safe harbor 401k plan could not specify ADP rules applying because that plan fails to have a requirement of the safe harbor, i.e., it does not have a plan provision specifying it is a safe harbor. Following the broader interpretation then to its logical conclusion, even a 401k plan designed not to be safe harbor could not specify that ADP will apply (or how it will be applied and handled).

[Bird]

John, I'm not sure I followed your last post, but getting back to the first one, the language simply says the safe harbor does not apply if no notice is given. It doesn't say "...and the plan reverts to regular ADP testing." So maybe if the plan says it is a safe harbor plan, and no notice is given, there's no safe harbor and no ADP test, and HCEs can't defer at all. I know I wouldn't be comfortable ignoring the regs and relying on simply toggling the notice on and off while the plan says "safe harbor" all the time.

[Tom Poje]

you have a document

it says the plan is safe harbor

not giving a notice does not take the plan out of safe harbor status.

at least according to IRS officials at numerous conferences. what you have is a failure to follow the terms of the document, namely, if you have a safe harbor plan you provide a notice. thus you have a possible disqualifying event. (at some conferences the IRS has said providing the notice ASAP under EPCRS is probably ok for the SHNEC, but they indicated a safe harbor match was problematic.

one such response is

e.g. American Bar Association Committee on Employee Benefits Q and A May 9, 2003

Company A adopts a safe harbor 401(k) Plan. IRS insists that each year that the safe harbor election is used, the employer must amend the plan to provide that the safe harbor contribution will be employed for that year. Is this correct?

Proposed Response: If the plan contains a default provision, annual amendment to employ the safe harbor is not necessary. The acceptable default provision provides that in any year where the required advance notice that the safe harbor fails to be given, the Plan is subject to the standard ADP test. The employer can file a copy of the safe harbor notice with the form 5500. This procedure cuts down unnecessary paperwork and is consistent with the statute providing for the safe harbor.

IRS Response: The IRS disagrees with the proposed answer. Notice 98-52 requires a notice to participants before the beginning of the year indicating the plan may be amended during the year to provide for a safe harbor nonelective contribution, and Notice 2000-3 provides for some flexibility by providing a supplemental notice to participants and amending the plan to provide for the nonelective contribution by December 1 of the plan year. There is NO DEFAULT OPTION under existing IRS guidance.

.........

as indicated, a plan using the 'maybe' option provides some flexibility, but even then some type of notice has to be provided.

[Kevin C]

I'm interested in what comments there might be for toggling in and out of 401k safe harbor plan year to plan year solely on the basis of a timely 401k safe harbor notice (or not) for the plan year, if the plan adopts the prototype with the language quoted 2 paragraphs and does not 'amend' from year to year.

If I understand you correctly, you are saying the document gives the employer the discretion to decide, without a plan amendment, if the safe harbor provisions will apply for a given year. If so, I think you may have a problem with 1.411(d)-4, Q&A 4. You can certainly amend to eliminate the SH contribution for a year, if you adopt the amendment before the beginning of the year. But, I don't think you can leave it to employer discretion whether or not employees receive the SH contribution for a given year.

Q-4: May a plan provide that the employer may, through the exercise of discretion, deny a participant a section 411(d)(6) protected benefit for which the participant is otherwise eligible?

A-4: (a) In general. Except as provided in paragraph (d) of Q&A-2 of this section with respect to certain employee stock ownership plans, a plan that permits the employer, either directly or indirectly, through the exercise of discretion, to deny a participant a section 411(d)(6) protected benefit provided under the plan for which the participant is otherwise eligible (but for the employer's exercise of discretion) violates the requirements of section 411(d)(6). A plan provision that makes a section 411(d)(6) protected benefit available only to those employees as the employer may designate is within the scope of this prohibition. Thus, for example, a plan provision under which only employees who are designated by the employer are eligible to receive a subsidized early retirement benefit constitutes an impermissible provision under section 411(d)(6). In addition, a pension plan that permits employer discretion to deny the availability of a section 411(d)(6) protected benefit violates the definitely determinable requirement of section 401(a), including section 401(a)(25). See §1.401-1(b)(1)(i). This is the result even if the plan specifically limits the employer's discretion to choosing among section 411(d)(6) protected benefits, including optional forms of benefit, that are actuarially equivalent. In addition, the provisions of sections 411(a)(11) and 417(e) that allow a plan to make involuntary distributions of certain amounts are not excepted from this limitation on employer discretion. Thus, for example, a plan may not permit employer discretion with respect to whether benefits will be distributed involuntarily in the event that the present value of the employee's benefit is not more than the cash-out limit in effect under §1.411(a)-11©(3)(ii) within the meaning of sections 411(a)(11) and 417(e). (An exception is provided for such provisions with respect to the nondiscrimination requirements of section 401(a)(4). See §1.401(a)(4)-4(b)(2)(ii)©.)

(b) Exception for administrative discretion. A plan may permit limited discretion with respect to the ministerial or mechanical administration of the plan, including the application of objective plan criteria specifically set forth in the plan. Such plan provisions do not violate the requirements of section 411(d)(6) or the definitely determinable requirement of section 401(a), including section 401(a)(25). For example, these requirements are not violated by the following provisions that permit limited administrative discretion: (1) commencement of benefit payments as soon as administratively feasible after a stated date or event; (2) employer authority to determine whether objective criteria specified in the plan (e.g., objective criteria designed to identify those employees with a heavy and immediate financial need or objective criteria designed to determine whether an employee has a permanent and total disability) have been satisfied; and (3) employer authority to determine, pursuant to specific guidelines set forth in the plan, whether the participant or spouse is dead or cannot be located.