discriminatory compensation

[cpc0506]

Client does not include bonuses in allocation of safe harbor 3%. After running the 414(s) Test, the plan fails, i.e., it looks as if the defintion of compensation is discriminatory in 2009. How is this corrected? And to what level?

The plan document also limits the HCE group to the top 20%. Does this limitation have to be applied to the 414(s) test, just as it is used for adp/acp testing? Or can I chose not to limit the HCE group for this test?

Thanks for you guidance.

[austin3515]

1) Failed 414(s) on a safe harbor = ADP Testing. When we've excluded bonus in the past it's only when the bonuses are negligilble and affect HCE's and NHCE's alike.

2) There is only one definition of an HCE that is applied for ALL purposes.

[Kevin C]

I don't think failed 414(s) on the safe harbor = ADP testing. If the plan says you will satisfy ADP/ACP using a safe harbor, but the plan does not, then you have a qualification issue. In a previous thread, it was suggested this could be corrected using an -11(g) amendment to change the compensation definition for the safe harbor.

From the Final 401(k)/401(m) Reg preamble:

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.

[austin3515]

Gotcha, this came up with the failure to deposit the SHNCE by 12/31 too. Essentially, you never go back to the ADP test in a safe harbor plan, because the plan would have to be amended to add the ADP test back, and there is no basis for such an amendment (absent a submission, but who knows where that would go).

[John Feldt ERPA CPC QPA]

It can be dangerous to have these kinds of exclusions in a safe harbor 401(k) plan unless additional language in the document exists to automatically limit the HCE compensation.

Because 414(s) has failed, the plan is now disqualified and no correction with reliance exists (that I know of) outside of a VCP application under EPCRS (Rev Proc 2008-50). I would recommend filing a VCP application.

For new and takeover plans, I recommend to try pointing these issues out during the design process so either language can be included to automatically limit the compensation for the HCEs such that a 414(s) failure could never occur, or just leave out the exclusion entirely.

[austin3515]

Are you sure an 11(g) amendment is out of line? Couldn't it be viewed as fitting within and (a)(4) failure? Maybe a bit indirect to apply this to 414s, but it seems unfair to suggest that the only allowable correction for a routine "ADP test like" failure is an IRS submission...

(2) Scope of corrective amendments. For purposes of satisfying the minimum coverage requirements of section 410(b), the nondiscriminatory amount requirement of §1.401(a)(4)–1(b)(2), or the nondiscriminatory plan amendment requirement of §1.401(a)(4)–1(b)(4), a corrective amendment may retroactively increase accruals or allocations for employees who benefited under the plan during the plan year being corrected, or may grant accruals or allocations to individuals who did not benefit under the plan during the plan year being corrected. In addition, for purposes of satisfying the nondiscriminatory current availability requirement of §1.401(a)(4)–4(b) for benefits, rights, or features, a corrective amendment may make a benefit, right, or feature available to employees to whom it was previously not available. A corrective amendment may not, however, correct for a failure to incorporate the pre-termination restrictions of §1.401(a)(4)–5(b).

[John Feldt ERPA CPC QPA]

That's the thing, maybe I am wrong about -11(g), but I don't see that a 414(s) compensation failure for a safe harbor plan can be allowed to fall under that section. If it was not a safe harbor plan, I see no problem of doing a -11(g) amendment (if it's even needed) when 414(s) fails.

The allocations must adhere to the terms of the plan. Safe Harbor provisions must be in place and remain unchanged for the plan year. Wouldn't a -11(g) amendment (as a fix) be making a change to the safe harbor allocations after the plan year started, and thus not allowable for a safe harbor plan?

[austin3515]

Sometimes I hate this profession...

[Kevin C]

The 414(s) failure causes the safe harbor 401(k) plan to not satisfy ADP/ACP, which is the sole means of satisfying 401(a)(4). That should make it eligible for correction via an -11(g) amendment.

1.401(k)-1(a)(4)(iv)(A) Exclusive means of amounts testing. --Elective contributions (including elective contributions that are designated Roth contributions) under a qualified cash or deferred arrangement satisfy the requirements of section 401(a)(4) with respect to amounts if and only if the amount of elective contributions satisfies the nondiscrimination test of section 401(k) under paragraph (b)(1) of this section. See §1.401(a)(4)-1(b)(2)(ii)(B).

The -11(g) rules also take care of the problem with the safe harbor amendment timing rules. The amendment is treated as if it were adopted and effective as of the beginning of the year.

1.401(a)(4)-11(g)(1) In general. --A corrective amendment that satisfies the rules of this paragraph (g) is taken into account for purposes of satisfying certain section 401(a) requirements for a plan year, by treating the corrective amendment as if it were adopted and effective as of the first day of the plan year. These rules apply in addition to the rules of section 401(b). Paragraph (g)(2) of this section describes the scope of the corrective amendments that are permitted to be made. Paragraph (g)(3) of this section specifies the conditions under which a corrective amendment may be made. Paragraph (g)(4) of this section provides a rule prohibiting a corrective amendment from being taken into account to the extent that it does not have substance. Paragraph (g)(5) of this section discusses the effect of the corrective amendments permitted under this paragraph (g) under provisions other than section 401(a).

[John Feldt ERPA CPC QPA]

"The 414(s) failure causes the safe harbor 401(k) plan to not satisfy ADP/ACP, which is the sole means of satisfying 401(a)(4). That should make it eligible for correction via an -11(g) amendment."

Sorry, I'm not seeing how ADP/ACP testing can be part of this. The ADP/ACP test is not applicable to a safe harbor contribution portion of a 401(k) plan. The plan gave a SH 3% notice or some kind of a SH match notice. The provisions adopted by the plan provide for safe harbor allocations that are not dependent upon ADP or ACP testing. So I am not seeing any ADP/ACP failure to fix because ADP/ACP testing is not applicable for a safe harbor plan. Do I misunderstand?

[Kevin C]

Safe harbor is how the plan is satisfying the ADP/ACP requirements.

401(k)(12) ALTERNATIVE METHODS OF MEETING NONDISCRIMINATION REQUIREMENTS. --

401(k)(12)(A) IN GENERAL. --A cash or deferred arrangement shall be treated as meeting the requirements of paragraph (3)(A)(ii) if such arrangement --

401(k)(12)(A)(i) meets the contribution requirements of subparagraph (B) or ©, and

401(k)(12)(A)(ii) meets the notice requirements of subparagraph (D).

[Tom Poje]

after a bit of a search, found the following, Q and A 62, from the 2009 ASPPA Conference

The final QACA regulations require a QACA to use a safe harbor

definition of compensation for deferrals and employer contributions

as of plan years beginning on or after 1/1/2010. Does this also apply

to SBJPA (i.e., 401(k)(12)) safe harbor plans? If a plan uses unsafe

definition of compensation and then fails the 414(s)compensation

test, what is the remedy?

Under Treas. Reg. §1.401(k)-3(b), the safe harbor contribution under the "old style"

(i.e., 401(k)(12)) safe harbor must be based on "safe harbor" compensation, which

requires a definition of compensation that meets IRC §414(s) (with some limitations).

If the compensation used for the employer contributions does not meet these rules,

the safe harbor contributions are likely insufficient and the CODA (and likely the plan)

won't meet qualification requirements. The correction would be to make up the

difference in contributions using a §414(s) definition of compensation plus earnings for

all affected years. By the way, the compensation eligible for deferral in a 401(k)(12)

safe harbor plan does not need to be nondiscriminatory under §414(s), but only

reasonable. On the other hand, deferrable compensation for QACA purposes must

meet the §414(s) definition. See Treas. Reg. §1.401(k)-3(j)(1)(i), last sentence. (And

you might want to change the definition of deferrable compensation in the future.)

[austin3515]

i.e., an -11(g) amendment?

[John Feldt ERPA CPC QPA]

And making this change would not violate the safe harbor requirement that the provisions must be in place before the beginning of the plan year?

[Kevin C]

The -11(g) amendment is treated as if it were adopted and effective as of the first day of the plan year. See the -11(g) quote above. So, the corrective amendment will satisfy the amendment timing rules.

[John Feldt ERPA CPC QPA]

So, as long as the -11(g) deadline has not passed, you may make changes to a safe harbor plan and use -11(g) as your basis for doing so. Does -11(g) require that a failure exist in order to utilize it?