SH Plan -- Mid-Year Amendment to Compensation Definition

[davef]

Would a mid-year amendment to a Safe Harbor plan's definition of Compensation (e.g., exclude bonuses) be permitted? Or would it violate the "plan year requirement" under Reg. Sec. 1.401(k)-3(e)? Could it be considered a reduction in the s-h match, which is permitted under 1.401(k)-3(g)?

[austin3515]

You're not allowed to amend any SH provisions mid-year, unless you follow the regs for such changes (which you reference). Also, better make sure 414(s) is not an issue, as failure of that test will kill your SH for any future year (not just this one)

Don't forget ADP testing applies in the year of the reduction, even if the new formula is a SH...

(4) The plan is amended to provide that the ADP test will be satisfied for the entire plan year using the current year testing method.

HEre's a good question though: LEt';s say your only amendment is to reduce the match, but it's still a safe harbor. So you switch from 100% of 4% down to basic match. Do you retain your top-heavy exemption even though the ADP test applies? Technically, the Plan still consists solely of 401k and safe harbor contributions. In fact the title of the section is "Reductions to the safe harbor match" which might imply that it continues to be safe harbor even though the ADP test applies...

Very interesting!

[12AX7]

Austin - if the definition of comp were amended to one that meets 414(s), are you saying it would kill the SH for any future year?

[austin3515]

I'm saying if the owner makes $400,000 before bonuses, and the only bonuses left are the bonuses for your sales team which make up 20% of their pay, and they make up 25% of your workforce, and they are all NHCE's, then you're not going to pass 414(s) and you're safe harbor is not going to be valid.