Safe Harbor - changed mind

[Sully]

Current safe harbor match plan. Employer has already provided notice to the employees that it will continue to be a safe harbor plan for 2011. The employer now changes its mind and does not want to be safe harbor for 2011. Please confirm that they can make this change and no matching contributions will be required for 2011 as long as they amend the plan by 12/31/2010.

Thank you.

[Lou S.]

You can amend out a safe harbor match.

But I'm pretty sure you need 30 days advance notice to participants so they may need to make the safe harbor match for one or more payrolls in January.

edit

Sungard has a nice pice on the steps required

http://www.relius.net/News/TechnicalUpdates.aspx?ID=432

[Kevin C]

The 30 day advanced notice requirement is part of the rules for mid-year suspension or reduction of the SH match. The Sungard article also covers mid-year changes. If the amendment is done by 12/31/2010, effective 1/1/2011, it won't be a mid-year change. My opinion is that you can amend by 12/31/2010 to remove the SH match effective 1/1/2011 without having to give 30 days advanced notice. You may have some upset employees, but that is not a plan issue. My recommendation would be to do the amendment asap and to suggest that they explain to the employees why the decision was necessary.

[GMK]

You may have some upset employees ...

explain to the employees why the decision was necessary.

Totally agree.

An important reason for the 30 day notice is to give employees sufficient time to decide how much to defer. Many base that decision on the match and/or the safe harbor status of the plan.

I, too, recommend that the employer actively tell participants what is happening and what it means, if only for the goodwill value. And try to accommodate the employees. For example, maybe allow employees to change their deferral rates before the end of the year (payroll will love that).

[Lou S.]

I'd agree if the SH notice for 2011 was not already handed out. I think since it was distributed to ees and you are now less than 30 days from the end of the year the IRS would treat it the same as a mid-year change in 2011. Though I'm not aware of any formal guidance on these specific facts.

[Sully]

The employer will definitely notify the employees of the change. They are a very good client and everything is done aboveboard. I would be very surprised if any of the employees had a problem with it. They are in the construction business and most of the employees are just happy to have a job at this point.

I agree with Kevin C’s assessment but do have some concerns since the safe harbor notice has already been distributed.

[Kevin C]

If you aren't comfortable with amending effective 1/1/2011, you can always use the approach Lou suggests. There is nothing wrong with providing 30 days advanced notice before the amendment is effective. I just don't see anything in the Regs that requires it unless it is a mid-year change.

[Tom Poje]

remember, the 30 day rule is so participants can make an 'informed' decision. Is less than 30 days sufficient time if you issue a notice saying the plan won't be a safe harbor? The IRS has somewhat implied yes, at least in the case of a 3% SHNEC in comments they made about late notices.

Years ago at the ASPPA Conference the question was posed "What if the company issues a notice but the plan was never amended to be a safe harobr?"

The IRS response was you follow the terms of the document, therefore the plan is not safe harbor. (Basically solve your own problems if people grumble)

in the case of a 'maybe' notice you provide 30 days notice of what will happen for the year, but the plan could be amended as late as 12/31.

what happens if you provided the maybe notice late? No guidance available I know of.

Personally, I think the answer to your particular question is not clear, at least at this time. If you had a money purchase or a DB plan and you amended to cease accruals before the start of the new year, I don't think you are on the hook for anything. once the plan year starts I think you have that 30 days or whatever to fund things. Again, in the case of a safe harbor, the notice is not the document. it is a piece of infomation to make an uinformed decision. If the safe harbor was the 3% shnec, does that effect how much someone is going to defer? I have my leanings that say "no', but those are my opinions only.

[Sully]

After all was said and done, the Employer decided to make the change effective February 1st.

Thank you for all of the responses.