Safe Harbor Plans - Midyear Changes

[Guest shaul]

Treas. Reg. Section 1.401(k)-3(e)(1) provides that "a plan which includes provisions that satisfy the rules of this section will not satisfy the requirements of section 1.401(k)-1(b) if it is amended to change such provisions for the plan year." Presumably, the reference to "the rules of this section" refers to anything even touched on in 1.401(k)-3. However, Announcement 2007-59 allows certain minimal changes to be made mid-year without violating this rule, and appears to be the IRS's only guidance on this regulatory provision (although the Announcement specifically requests comments on whether further guidance is needed). Does anyone have any experience as to how the IRS is enforcing this rule? An IRS agent I spoke to expressed the view that absolutely no changes are allowed of any sort, once the plan year is underway, that would in any way change the information provided in the safe harbor notice, even if the change is highly favorable. Does a mid-year change mean the plan is disqualified outright (since 1.401(k)-1(b) deals with "coverage and nondiscrimination requirements")? That seems unduly harsh if the change is a minor one that doesn't affect the level of safe harbor contributions or other core elements of the safe harbor design.

Thanks.

[Tom Poje]

At the 2009 ASPPA Conference, this was the Q and A #8

Question

It is very common to want to restate a safe harbor takeover plan to

our document mid-year. We are currently telling clients we cannot

make any changes to a SH plan other than adding Roth and

expanding hardships, until the beginning of the next plan year. If the

change does not affect the CODA portion of the plan (i.e.. the

401(k) deferrals and the safe harbor contribution) or if it is more

generous, is it permissible to make the change mid year?.

Examples:

• add a profit sharing feature

• change allocation conditions for the profit sharing formula to

eliminate last day requirement

• eliminate permitted disparity from a plan with a last day

requirement

• eliminate all distribution forms except for lump sum?

• liberalize eligibility requirements or entry dates?

IRS Response

IRS Announcement 2007-59 provides guidance only for mid-year changes to add a

Roth deferral feature or hardship withdrawals. Comment was requested on whether

additional guidance was needed with respect to other mid-year changes. To date, no

further guidance has been issued.

...............

so, at the moment, there are no other guidelines to follow, even if it would 'improve' things as you indicate.

Q and A's do not necessarily reflect the actual position of the treasury, but they are good guidelines.

[Guest shaul]

Thanks, Tom.