Amending to remove 401(k) safe harbor mid-year

[Belgarath]

I'm soliciting opinions on this. Most plans that provide for a safe harbor nonelective (or match, for that matter) will be either prototype or Volume Submitter plans.

Technically, this is not a required amendment. So if a plan sponsor adopts it, will this remove the plan from prototype or VS status?

Common sense would be that it would not. This new relief in the proposed regulations is predicated upn the idea that it is better to have an employer continue to maintain a plan, rather than have to terminate it. Yet many small employers, when faced with filing for a determination letter, would simply opt to terminate the plan. When they truly have a business hardship, they surely won't want to pay extra fees associated with "custom" documents.

Any thoughts on this issue? Anyone discussed this with the IRS yet?

Many thanks.

[Guest Sieve]

For what purpose do you ask if the prototype document will no longer be a prototype plan? For purposes of being eligible for VCP? For purposes of remaining on the 6-year amendment cycle?

[imchipbrown]

The prototypes I've dealt with have a checkbox "This IS or IS NOT" a Safe Harbor 401(k). If I were trying to recind a Safe Harbor decision (assuming I could [i haven't read up on this]), I'd be doing resolutions stating that effective such and such a date, checkbox blah, blah, blah is unchecked and the opposite checkbox is selected. I'm not amending a document, just an Adoption Agreement option. I probably would have a replacement page, initialed or signed and dated, showing the new option selected.

[K2retire]

Since most prototypes allow either safe harbor or not among their choices, amending out of safe harbor status should not take the plan from prototype to individually drafted. Are you asking because you're seeing a document that doesn't have a non safe harbor among its options?

[Belgarath]

My concern is based upon requirement #4 as stated in the preamble to the regulations, which says "...(4)the plan is amended to provide that the ADP test will be satisfied for the entire plan year in which the reduction or suspension occurs, using the current year testing method;..."

I suppose it depends upon how you want to interpret this requirement. The resonable interpretation is as y'all have suggested - you amend so it is no longer safe harbor, and you therefore have to test based upon the existing plan language for a non safe harbor. But we're thinking ahead to plan termination, and we've had a lot of trouble with the IRS idiots in plan termination who don't know anything, as I've posted before. We can anticipate problems where they might want such language pulled into an entire separate amendment. Am I just being overly paranoid?

Sieve - we'd be concerned with reliance on a favorable opinion/advisory letter as a determination letter for any purposes where it might matter.

[Guest Sieve]

Belgarath --

Best as I can tell, almost any amendment to a VS or M&P plan will permit the plan to continue to be eligible for the 6-yr. amendment cycle, unless the amendment is deemed to be too significant (or unless it turns the plan into one with respect to which an IRS approval letter cannot be issued, such as an ESOP). (See Rev. Proc. 2005-16, Sections 24.02 & .03; Rev. Proc. 2007-44, Sections 19.02 & .04.) As a practical matter, I have had plans which start with a VS doucment but which contain what I consider to be significant changes to that VS document, yet the IRS has not objected to filing for an FDL on a Form 5307 (which I think is a very good argument that you can remain on the 6-year cycle). Of course, reliance on a VS or M&P IRS approval/opinion letter, when there has been almost any change to the document, is limited (or non-existent), so an FDL generally will be required in order for there to be reliance. (Without obtaining an FDL in those circumstances, this lack of reliance may cause a bit of a problem upon application for an FDL at plan termination.) But, at least the 6-year cycle generally is not lost as a result of employer amendments to M&P and VS documents.

Self-correction under EPCRS for a significant operational failure is only available if the plan is subject to an FDL (Rev. Proc. 2008-50, Section 4.03)--but, an FDL is not required to self-correct an insignificant operational failure or to correct through VCP. And, if there has been an amendment to a M&P or VS document, the plan no longer falls within the EPCRS definition of favorable letter. (Rev. Proc. 2008-50, Section 5.01(4).) So, a non-conforming change to a pre-approved document eliminates SCP for a significant operational failure, and thus requires VCP.

At least, that's my interpretation of the various convoluted rules.

So far, I don't think the down-sides of a non-conforming amendment to a VS or M&P document are major issues. Are there any other uses of pre-approved plans that you have in mind that might be adversely impacted by a non-conforming amendment

[Belgarath]

Nope.

And thanks for the response.

[Belgarath]

But I did just think of one other area of concern. The preamble also states that the plan must prorate the 401(a)(17) compensation limit - presumably for allocating the safe harbor contributions only, as per another discussion thread. And our plan does not currently have language that would automatically accomplish this if the safe harbor is reduced/eliminated.

Do your documents have such language, or will they require amendment for this?

[Guest Sieve]

The document I use for most of my plans (Corbel volume submitter, prototype-style) contains this language--and I presume most other doucments have similar language:

"For Plan Years beginning on or after January 1, 2002, Compensation in excess of $200,000 shall be disregarded for all purposes, except that for purposes of salary deferral elections, the Administrator is not required to disregard Compensation in excess of $200,000. Such amount shall be adjusted by the Commissioner for increases in the cost-of-living in accordance with Code Section 401(a)(17)(B). The cost-of-living adjustment in effect for a calendar year applies to any determination period beginning with or within such calendar year.

If a determination period consists of fewer than twelve (12) months, the $200,000 annual Compensation limit will be multiplied by a fraction, the numerator of which is the number of months in the determination period, and the denominator of which is twelve (12)

." (Section 1.14(f), emphasis added.)

I think this covers the waterfront (since "determiantion period" is not a defined term). If a plan has no comparable language, then a good-faith amendment for SHNEC (or match) mid-year change ought to add it.

[Belgarath]

Ah, thanks. That makes good sense. And our document DOES have similar language.