Discussion with Author of 98-52 (Safe Harbor 401k)

[Guest John Smith]

Could you please clarify; If a sponsor abandons a safe harbor plan design at mid year by amending their document to change a matching formula to one that no longer meets the "Basic Matching Formula", then is the plan simply subject to ADP/ACP testing or do they now have a defect similiar to failing to meet a full funding requirement?

[LCARUSI]

I spoke to Roger Kuehnle. I posed this question: Can a Sponsor abandon safe harbor status in the middle of a plan year due to financial hardship or other substantial reason?

The short answer is no. By issuing the notice to participants, the Sponsor is making a commitment for the full year - similar to the commitment made under a money purchase pension plan. Any attempt to manipulate results by having a short plan years and/or changing plan years (or even terminating the Plan in mid year) would be subject to the general anti-abuse language contained in section E of the notice.

If a SPonsor has a significant reason to abandon safe harbor status, they would be advised to seek specific advance approval from the IRS, e.g. VCR.

[LCARUSI]

To John Smith:

The later.

The gist of the conversation was that mid-year changes are not permitted.

[Guest Beth N]

An old topic, I know, but I have a small point to confirm--

Even if you can't abandon mid-year, I presume you CAN choose each year whether to apply the safe harbor for the coming year, which is why the notice requirement is stated as a requirement for "each year." So, for drafting purposes, you could have two options - option 1 is old plan w/ resulting ACP/ADP testing, and option 2 is safe harbor plan w/ no testing, which is only effective if ER provides timely notice. Correct?

[SoCalActuary]

This topic is being asked the IRS by more than one industry source. However, a safe-harbor is a commitment of no more than 4.5% of pay using the match, or 3% for the non-match. The IRS is taking a hard line here, but they think these are small amounts.