SH plan - late notice

[M Norton]

An employer has sponsored a calendar year safe harbor 401(k) for several years, using a 4% match to satisfy the SH requirements. They're thinking about discontinuing the plan but have handed out the SH notice anyway. Problem is that they did not indicate what the SH contribution would be for next year.

Don't they have to give the notice at least 30 days prior to the beginning of the year? Or is it 30 days before the first payroll of the year?

And if the notice is not distributed timely to participants, does that mean the plan will not be a safe harbor plan for 2010?

Thanks!

[austin3515]

If they didn't indicate what the contribution would be, then it wasn't a safe harbor notice anyway.

30 days before the beginning of the Plan Year means you're deemed to meet the timely notice requirement. But facts and circumstances could still indicate that you're ok even after that window. In my opinion, if the employer is still deciding whether or not to be a safe harbor, that would be a factor that might suggest delaying the notice was OK. I think the date of the first payroll would also be a legitimate factor to point to (the later in the year the better).

If the notice is not provided, does that kill the SH? I can't recall if that has been answered in EPCRS yet or not, and I don't have time to look it up .

[Tom Poje]

if yoy have a document, and the document says the plan is a safe harbor, then the plan is a safe harbor. end discussion.

failure to provide the notice is simply a failure to follows the terms of the document, that is, since the plan is a safe harbor you must issue a notice. so you issue the notice as soon as possible.

I sure hope the document indicates just what type of safe harbor is provided - despite what the notice didn't say.

as indicated, 30 days is 'safe', that is, it is 'reasonable'. you could do less, and depending on facts and circumstances, a shorter time frame could be deemed reasonable. before it gets too late into December, I would amend the plan, pass out a SMM indicating whatever - plan is no longer safe harbor and get on with life.

the only possible concern is to eliminate a safe harbor you have to give 30 days notice. so does that mean it is too late now? I don't think the IRS has addressed that issue. the regs do say "because the plan is amended during a plan year..." 1.401(m)-3(h)(1). well, the plan isn't being amended "during" the year. it is being amended before the plan year begins.

though the notice must be given 30 days before the plan year begins to be reasonable

1.401(k)-3(e)(i) indicates the actual amendment to the plan only needs be adobted before the plan year begins.

[MWeddell]

if yo have a document, and the document says the plan is a safe harbor, then the plan is a safe harbor. end discussion.

I question that, Tom.

It seems to me that a plan is a safe harbor plan if and only if it meets the requirements specified in the 401(k) regulations, one of which is that the plan document specify which safe harbor it meets. It seems to me that potentially (but it'd have to more extreme than issuing the notice a little bit less than 30 days in advance) a plan could state that it is a safe harbor plan but that the proper correction for not following the plan document and not meeting the safe harbor requirements is to run the ADP/ACP tests.

[Tom Poje]

in this case, I believe the IRS would disagree.

the preamble to the final regs (p23) at http://www.ustreas.gov/press/releases/repo...22804td9169.pdf

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.

other comments from IRS officials can be found. here is one

2002 ASPPA conference

# 2. A Safe Harbor 401(k) plan fails to make 3% nonelective contribution by the end of the subsequent plan year. It would appear that plan is no longer a safe harbor and must perform ADP (and possibly ACP) testing. Additionally safe harbor contribution still must be made. Contribution is made (with earnings) 18 months after year-end. In performing testing can the safe harbor contribution be considered a “corrective” QNEC per Rev. Proc. 2002-47?

IRS response: The premise posed above is incorrect. If you don’t make a required Safe Harbor contribution, you have a potentially disqualified plan!

The above correction is reasonable.

[J Simmons]

But the IRS national office gave out opinion letters on 3/31/2008 to EGTRRA prototype 401k plans that included language that the plan is only safe harbored, and thus the 3% of pay or match contribution is only required to be made for a year as to which the yearly safe harbor notice was provided.

I agree that to be safe harbored out of the ADP and/or ACP testing for a year, both (a) the plan documents must provide for such, and (b) a timely notice was given. You can't get to a safe harbor year just by giving a notice (#b) for a plan without the necessary (#a) language. The language described in the paragraph above satisfies the (#a) requirement.

The question really is what happens in a plan year for which the plan's governing documents have (#a) language, but for which no notice (#b) is given? Obviously, the plan cannot avail itself of the safe harbor from ADP and ACP testing. Those tests will apply.

For such a year, does the plan have to make a contribution per its 'safe harbor' terms? If the (#a) language in the plan document says such will be made, with no contingency depending on whether the notice (#b) is given, then yes, under ERISA the contribution must be made. That's because that's what the plan says.

However, if the plan says that the plan will only be safe harbored and the necessary contribution be made for a year as to which the notice (#b) is timely given, then that contingency is not satisfied if the notice (#b) is not given and the ERISA rule that the plan document be followed is not violated because no safe harbor contribution is made.

I think this approach is entirely consistent with the preamble quoted and ASPPA Q&A. I think that those provisions are aimed at explaining that you cannot have the language (#a), timely give a notice (#b), and then choose not to make the contribution and instead do ADP/ACP testing. This reading appears to be the only reconciliation of such provisions with the fact that the National Office keeps issuing opinion letters for prototypes with language in the plan's governing documents as described in the first paragraph of this post.

[Guest Sieve]

Assume the plan does not make the SH contribution contingent on giving notice. Are you suggesting, John, that failure to give the SH Notice (& let's make it easy and assume that Notice is not given at all) means that a plan must (a) make whatever SH contribution the document provided, and (b) pass ADP & ACP?

[J Simmons]

Hey, Larry,

The ADP and ACP tests would apply to the plan year, because all the conditions for the plan year to be safe harbored have not been satisfied. I.e., no safe harbor notice for the plan year.

If the plan's safe harbor language provides that the ER will make a contribution (3%-of-pay or the match) and does not specify that it is dependent on the safe harbor notice having been timely given, it is arguable that the plan language obligates the ER to make that contribution even for a year that the safe harbor notice was not given and thus the ADP and ACP tests apply.

Depending on how the safe harbor provisions in the plan read, the contribution might or might not be required for a year that the notice is not given. ERISA requires that the plan be applied as written. But if the provision reads in a way that the contribution is not required for a plan year for which the notice is not given, then I do not think it has to be made.

[austin3515]

Does corbel's prototype include that "contingnent on distributing the safe harbor notice" language? If so, can someone point out the language?

[Guest Sieve]

austin -- That language is not in the Corbel prototype's Basic Plan Document. Section 12.8(a) of the BPD doesn't mention the Notice (and requires that the plan be a SH plan if SH provisions are elected in the AA), and Section 12.8©(4) requires that the notice be given but doesn't make the SH contribution contingent on giving a SH notice. So, if no notice is given, then (i) you still have a SH plan, (ii) you have to make the SH contribution, and (iii) you need to correct the fact that no notice was given. But, such language is in Corbel's IDP (the Volume Submitter) document.

John -- Interesting that what I'll call a "contingent" SH plan (i.e., one where SH status is based on actually giving the SH notice--as differentiated from an "if maybe" SH plan) probably does not make the 100% vesting of SH contributions contingent on the Notice being given. So, not giving notice in such a plan would eliminate the automatic pass for ADP/ACP testing, but would not eliminate full vesting for the match (even though the plan no longer is a SH plan). And, what about the need to return the match if there's a failed ADP? If you do that,you'd be violating the plan's SH match language (if all participants are entitled to the SH match). What then? Does that mean you can only correct a failed ADP by making a QNEC so you don't take away from the promised SH match?

[J Simmons]

austin -- That language is not in the Corbel prototype's Basic Plan Document. Section 12.8(a) of the BPD doesn't mention the Notice (and requires that the plan be a SH plan if SH provisions are elected in the AA), and Section 12.8©(4) requires that the notice be given but doesn't make the SH contribution contingent on giving a SH notice. So, if no notice is given, then (i) you still have a SH plan, (ii) you have to make the SH contribution, and (iii) you need to correct the fact that no notice was given.

How do you do that, Larry? By passing the ADP and ACP tests?

[Guest Sieve]

No idea. The IRS has no idea, either (since in the most recent EPCRS it has asked for suggestions on how to correct the failure to give a SH notice - see Section 2.02(2)). But, if a plan requires that Notice be given, and it's not given, then--whether or not that results in a SH plan, depending on plan language--the plan's terms have been violated and the operational violation needs to be corrected.

By the way, John, look at my prior post again--I revised it (at the end of the last paragraph) and asked you some questions that you may not have seen.

[Tom Poje]

the IRS solution when no notice is provided. This was one of their better comments because the gave an example of 2 employees, one who had been a participant and another who was a new participant.

http://www.irs.gov/retirement/article/0,,id=200386,00.html

[J Simmons]

By the way, John, look at my prior post again--I revised it (at the end of the last paragraph) and asked you some questions that you may not have seen.

And, what about the need to return the match if there's a failed ADP? If you do that,you'd be violating the plan's SH match language (if all participants are entitled to the SH match). What then? Does that mean you can only correct a failed ADP by making a QNEC so you don't take away from the promised SH match?

I think you are correct that the return of the "SH" match in that circumstance is not an allowable correction.

[J Simmons]

the IRS solution when no notice is provided. This was one of their better comments because the gave an example of 2 employees, one who had been a participant and another who was a new participant.

http://www.irs.gov/retirement/article/0,,id=200386,00.html

Hi, Tom,

Sad to see the pix of you in the pilgrim outfit gone for another year.

Earlier this year, I became involved in an audit by the IRS of a plan that had language like the corbel prototype (not its VS) but after 1 year, the ER stopped giving the annual SH notice or making the SH contribution. Several years passed, and the IRS audited claiming that the SH contribution + imputed earnings must be contributed to the plan, since the plan document calls for that. Looking over the half dozen ensuing years, the ADP and ACP tests were not run (and failures not corrected). We've run those tests, and only a couple fail, and by very close margins--a very small corrective contribution would do the trick.

With the auditor, I raised the example from the IRS website that you included a link to. Basically, the auditor and his manager have dissed that example. The audit process is coming to a head and I should know more about how it shakes out very soon.

[Tom Poje]

I'm sure I'm not the only one who is curious as to how the results turn out. Of course, any such results are somewhat like a private letter ruling, so....(not surprised the auditor says the safe harbor must be made)

I vaguely recall when safe harbors first came out, the idea (false or otherwise) was that if a plan didn't issue the notice (or provided it late) the plan had to do testing. I think it was even in the ERISA Outline Book in one of the early editions. But that was many years ago, and I thought the IRS had been pretty clear on the issue the last few years.

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hope this picture will suffice for the month.

(as I bake breads and cookies to give away, so its the 'reformed' Grinch)