Amending a Safe Harbor Plan

[KateSmithPA]

At the IRS Q&A at the end of the ASPPA conference, there was a discussion about amending safe harbor plans mid-year. I got the feeling that one should be very careful about doing that, especially if the amendment affects something in the SH Notice.

A client has a 401(k) with the 3% non-elective contribution. The plan allows for quarterly changes to deferral %. This is reported in the SH Notice. One of the doctors just discovered that she is not going to max out and wants to change her deferral % now. The employer would like to allow the change. Under the section, "Deferral Modification", the docoument states that "the Plan Administrator may adopt procedures that override any election in this section without a plan amendment."

Any thoughts about this? We would not want to put our client's plan in jeopardy.

Thank you.

Kate Smith

[Kevin C]

I'm not sure how much I would rely on the IRS response to this question. Their entire discussion was based on the statement that the mid year amendment prohibition is part of the Notice Requirement rules in the SH regs. It isn't. The mid-year amendment prohibition is part of the Plan Year Requirement in 1.401(k)-3(e). The same rule is part of the Plan Year Requirement in 1.401(m)-3(f).

1.401(k)-3(e) Plan year requirement

(1) General rule. --Except as provided in this paragraph (e) or in paragraph (f) of this section, a plan will fail to satisfy the requirements of sections 401(k)(12), 401(k)(13), and this section unless plan provisions that satisfy the rules of this section are adopted before the first day of the plan year and remain in effect for an entire 12-month plan year. In addition, except as provided in paragraph (g) of this section, a plan which includes provisions that satisfy the rules of this section will not satisfy the requirements of §1.401(k)-1(b) if it is amended to change such provisions for that plan year. Moreover, if, as described under paragraph (h)(4) of this section, safe harbor matching or nonelective contributions will be made to another plan for a plan year, provisions under that other plan specifying that the safe harbor contributions will be made and providing that the contributions will be QNECs or QMACs must also be adopted before the first day of that plan year.

I read that as saying that any plan provisions that satisfy the rules of 1.401(k)-3 and 1.401(m)-3 can't be changed mid year. The two exceptions listed in the reg. are using the conditional 3% SH notice and mid year suspension or reduction of a SH match, which don't apply here. Restrictions on the timing of deferral elections are mentioned in 1.401(k)-3©(6)(ii) as part of the SH match rules, but I don't see anything similar in the 3% SH rules. Since you have a 3% SH, I think you have a strong argument that the plan provision dealing with the timing of deferrals election is not one of the provisions that satisfies the rules of the SH regs, so it can be amended mid-year.

I don't think it matters that the document allows a change in procedures instead of a formal plan amendment. Provisions that satisfy the rules in 1.401(k)-3 must remain in effect for the entire year. That prevents a change to those provisions even if no amendment is needed.