Safe Harbor Plan

[Guest mdcb]

Can a 401(k) plan with Safe Harbor NECs plus matching contributions of 50% of elective deferrals up to 6% of comp. eliminate the matching contribution feature mid-year and remain a safe harbor plan? Will the plan be required to conduct ACP testing for the year?

[Tom Poje]

was this a required match or a discretionary match?

if discretionary, then it wouldn't meet the safe harbor because it matched greater than 4% of comp.

If required match, then the match could have been a safe harbor, and I'd say you follow the regs of 1.401(m)-3(h) follow...e.g. you have to give 30 days notice, you have to run the ACP test, etc.

[Guest mdcb]

The match is required, not discretionary. I was not sure whether 1.401(m)-3(h) would have to be followed if the plan was not relying on the match for its safe harbor status (i.e. the plan is relying on the Safe Harbor NECs which will remain in place).

[K2retire]

Tom,

50% of 6% is less than 4% in my world. Why wouldn't it meet the safe harbor requirements.

[Guest mdcb]

I think that I am focusing on the language of 1.401(m)-3(h) which states that it applies to "safe harbor matching contributions", and I took this to mean safe harbor matching contributions under 1.401(m)-3©/1.401(k)-3©, which serve as the basis for the plan's safe harbor status under 1.401(k)-3(a)/1.401(m)-3(a).

Since the plan's matching contribution is not the basis for its safe harbor (i.e. it is not under 1.401(m)-3©/1.401(k)-3©), I did not think that section (h) applied. Instead, the plan's safe harbor contributions are NECs under 1.401(m)-3(b)/1.401(k)-3(b), and the plan will continue to have the NECs. (According to both 1.401(k)-3(a) and 1.401(m)-3(a), the plan only has to have safe harbor contributions under (b) OR ©. Here, it will continue to have safe harbor NECs under (b).) I guess I am distinguishing between safe harbor matching contributions under 1.401(m)-3©/1.401(k)-3© and other, additional matching contributions that are contained in a plan that already has safe harbor contributions (such as NECs) and that simply meet the requirements under 1.401(m)-3(d), et seq. Perhaps this differentiation is not appropriate???

In any event, I suppose the issue also comes with the language of 1.401(m)-3(f). This section clearly indicates that the plan provisions necessary to satisfy the requirements of the regulation (e.g. the requirement to provide safe harbor contributions such as a NECs under 1.401(m)-3(b) or safe harbor matching contributions under 1.401(m)-3©, as applicable, and the requirements in 1.401(m)-3(d) re: cap on matching contributions, etc.), must remain in place for the entire 12-month plan year. In other words, the plan could not be amended mid-year to eliminate the NECs or to increase the additional match so that it exceeds 6% of safe harbor compensation and still constitute a safe harbor for purposes of the ACP test. But, what about the elimination of the additional match which is not the basis for the safe harbor all together? Do you think that 1.401(m)-3(f) locks the sponsor into having the additional, "non-safe harbor basis" match for the entire year?

Do you think these issues would be avoided if the match is eliminated at the close of the plan year, so that the next plan year, there the plan only has NECs, and no matches? Would (h) have to be complied with in this case since it would not be a mid-plan year amendment?

Any thoughts would be greatly appreciated!!

[Kevin C]

1.401(m)-3(f)(1) General rule. --Except as provided in this paragraph (f) or in paragraph (g) of this section, a plan will fail to satisfy the requirements of section 401(m)(11), section 401(m)(12), and this section unless plan provisions that satisfy the rules of this section are adopted before the first day of that plan year and remain in effect for an entire 12-month plan year. In addition, except as provided in paragraph (h) of this section, a plan which includes provisions that satisfy the rules of this section will not satisfy the requirements of §1.401(m)-1(b) if it is amended to change such provisions for that plan year. Moreover, if, as described in paragraph (j)(4) of this section, safe harbor matching or nonelective contributions will be made to another plan for a plan year, provisions under that other plan specifying that the safe harbor contributions will be made and providing that the contributions will be QNECs or QMACs must also be adopted before the first day of that plan year.

The match formula must satisfy the limitations of 1.401(m)-3(d) for the plan to be ACP SH. To me, that makes it part of the "provisions that satisfy the rules of this section" (section meaning 1.401(m)-3). So, I read it as saying you can't amend the match formula mid-year and stay safe harbor. You can eliminate the match effective at the beginning of next year.

(h) only applies to amendments during the year.

[BG5150]

was this a required match or a discretionary match?

if discretionary, then it wouldn't meet the safe harbor because it matched greater than 4% of comp.

If required match, then the match could have been a safe harbor, and I'd say you follow the regs of 1.401(m)-3(h) follow...e.g. you have to give 30 days notice, you have to run the ACP test, etc.

I thought it was you cannot match deferrals that were more than 6% of comp, and the total match couldn't be more than 4% of comp. So, you could go as high as 66.67% of deferrals up to 6% of comp and still be okay.

[Tom Poje]

k2retire- unlike the scarecrow, my brain doesn't always work properly. you are correct of course.

I think the safe harbor rules have created a bit of an unintended anomaly as this example situation points out.

I have a required match which meets all the requirements of a safe harbor match, and since I have provided a SHNEC what do I do?

For the past X years I have treated it as a safe harbor match. but am I required to do so? My reading of the code says no, but rather if you meet all the requirements you can take advantage of this option. (Unless I guess in your safe harbor notice you specifically state it is intended to satisfy the safe harbor)

but if true, then the section in the 401(m) regs pertaining to eliminating a safe harbor match make little sense since you never had to treat it as such in the first place - unless that only pertains to a match used to satisfy both ADP safe harbor and ACP safe harbor. I don't think it reads that way, but what the heck.

in either case you have to do ACP testing, the only issue is whether you can simply stop the match or provide a 30 days notice. I haven't heard the issue addressed in a nonsafe harbor required match if you have to provide 30 days notice, so I am not 100% sure.

oh well, maybe if I get a chance next week at the ASPPA Conference I can snag one of the IRS agents and ask them.

[Guest Scott Foreman]

I'm confused. If the matching contribution isn't being used to satisfy the plan's Safe Harbor requirement, why would eliminating that match mid-year cause the plan to have to run the ACP test?

Thanks,

Scott

[AKconsult]

I agree w/ Scott.

The SH NEC lets you avoid ADP.

Additionally, if there is a non-safe harbor match, it will satisfy the ACP as long as it meets certain requirements, which this match does since it is only 50% of 6%.

I don't see why eliminating the match would require an ACP to be performed for the year.

It seems to me that the Regs are focused on making sure that if there is a non-safe harbor match, it doesn't exceed a prescribed amount and there aren't any allocation conditions placed on it, not on requiring the match to be given for the entire plan year.

I can't find any reason to think that stopping the non-safe harbor match mid-year would throw the plan into having to perform the ACP test. It seems to me that the plan is only required to revert to ACP testing if the safe harbor contribution was a match, not a nonelective.

[Guest mdcb]

Scott, I think that is the crux of my question, and to me, I think it depends on the interpretation of 1.401(m)-3(f).

During the period the match is in place, the plan meets the safe harbor requirements, and putting the issues regarding the match elimination itself aside, the plan will continue to have all of the features required for a safe harbor plan after the match is eliminated. In other words, after the elimination, it will be a plain safe harbor plan using NECs to satisfy the safe harbor requirements without any matching contributions.

For the reasons stated above, I don't think that the elimination of the match falls under 1.401(m)-3(h). It seems to me that the only provision that may pose an issue regarding the elimination of the match is 1.401(m)-3(f) which states: "a plan which includes provisions that satisfy the rules of this section will not satisfy the requirements of §1.401(m)-1(b) if it is amended to change such provisions for that plan year." Is the match itself a provision that satisfies the rules of the regulation?? The match is not required to exist at all. However, to the extent it does, it is designed to satisfy the requirements of 1.401(m)-3(d). What do you think?

[Guest Scott Foreman]

mdcb, here is how I interpret that section. In this case the matching contribution could "satisfy the rules of this section", but isn't being used in that capacity. Therefore, the discontinuance of the matching contribution is not applicable to 1.401(m)-3(f). I'm certainly not an attorney, but that is how I read that section.

Just because the match looks like a SH match, doesn't mean that it falls under the SH rules.

[Kevin C]

Do you realize that by arguing the matching contribution does not "satisfy the rules of this section" that you are also arguing that the plan does not satisfy the ACP safe harbor?

Look at

1.401(m)-3(a)(1) Section 401(m)(11) safe harbor. --Matching contributions under a plan satisfy the ACP safe harbor provisions of section 401(m)(11) for a plan year if the plan satisfies the safe harbor contribution requirement of paragraph (b) or © of this section for the plan year, the limitations on matching contributions of paragraph (d) of this section, the notice requirement of paragraph (e) of this section, the plan year requirements of paragraph (f) of this section, and the additional rules of paragraphs (g), (h) and (j) of this section, as applicable.

If the plan is to satisfy the ACP SH, then the match must satisfy the limitations on matching contributions of paragraph (d). Paragraph (d) has several restrictions that the match formula must satisfy. An ACP SH plan must also satisfy paragraph (f) which includes a prohibition of mid year amendments to plan provisions that satisfy the ACP SH regs. If you want the plan to be ACP SH, then the match formula must "satisfy the rules of this section"

If you want to argue that the SH rules are harsh and illogical, I'll agree with you. But, the rules are what they are.

[Guest Scott Foreman]

Kevin C, I stand corrected. Thank you. I was mis-interpreting the regulations and have learned something new today (as I usually do when visiting this board). I appreciate the clarification.

Scott

[Tom Poje]

I did ask one of the document/legal gurus at the ASPPA conference about eliminating a required match when the plan was already satisfying the ADP with test with teh 3% SHNEC.

the response was that as of this time the IRS has only approved modifying a safe harbor document in only a few ways (e.g. adding a Roth, etc). in addition, of course we have eliminating a safe harbor feature.

there are no provisions for amending eligibility (e.g. allowing more people into the plan) or other such things.

I think the conclusion being you can't eliminate a required non-safe harbor match without possibily creating a time warp or something otherwise nasty until we get futher guidance.