Prevailing wage question

[K2retire]

Client has an existing 401(k) plan with an Enhanced Safe Harbor Match up to 4% of pay. They are about to begin a job that will require meeting the state's prevailing wage laws. "Someone" has told them they can apply the 4% match to that requirement.

The document has an option (not marked) for a prevailing wage contribution in the profit sharing section, that says it can be used to offset the Safe Harbor contribution. Reading that section, it sounds to me as if it could be amended to accomplish what the client wants. My question is if such an amendment mid-year would jeopardize the plan's safe harbor status for the year.

[Kevin C]

You probably won't get a definite answer. It will depend on how you interpret the available guidance. The only thing on topic I can point you to is in the Regs. The same language is in 1.401(m)-3.

1.401(k)-3(e)(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.

The question is, are any of the provisions you need to change considered provisions that satisfy 1.401(k)-3 or 1.401(m)-3? If the answer is yes, then you can't amend mid-year. But, sometimes that isn't an easy question to answer. If it isn't clear, the conservative approach would be to have the amendment effective at the first of next year.

I do have a question about the direction of the offset. Does the SH contribution reduce the prevailing wage PS contribution? Or, does the prevailing wage PS contribution reduce the SH contribution?

[K2retire]

The provision we're looking to add says, "The Employer will make a Prevailing Wage Contribution on behalf of each Participant who performs services subject to the Service Contract Act, Davis-Bacon Act or similar Federal, State, or Municipal Prevailing Wage statutes. The Prevailing Wage Contributions shall be an amount equalt to the balance of the fringe benefit payment for health and welfare for each Participant (after deducting the cost of cash differential payments for the Participant) based on the hourly contribution rate for the Participant's employment classification, as designated on Schedule A as attached to this Adoptiona Agreement. The Prevailing Wage Contribution shall not be subject to any age or service requirements set forth in Question 15. nor to any service or employment conditions set forth in Question 32. and will be 100% Vested." and "...if the Prevailing Wage Contribution is a Qualified Nonelective Contribution as selected above, then it will offset any ADP test safe harbor contribution...."

That sounds like the Prevailing Wage Contribution would reduce the SH. The unknown "someone" who told them about this initially indicated it would work the other way around.

[Kevin C]

Hmmm, our VS document has the same kind of provision. It also has a place in the safe harbor section to elect to have the safe harbor contribution offset the PS contribution if the SH is not allocated to all eligible participants.

Our pre-approved VS document clearly allows a non elective prevailing wage contribution to reduce the amount allocated as a SH match. I don't understand how that can be done and still satisfy the match SH requirement of allocating a QMAC of at least the basic SH match. But, it must be ok since it was approved by the IRS. We don't have any prevailing wage plans, so I've never looked at this before.

In your case, I'm thinking you would not be able to make this change mid year. While it wouldn't really affect the amount of SH contribution each person receives, it does affect where it is allocated. It seems to me that it would be similar to a provision saying that the SH contribution is allocated in another plan. My thought is that it would be considered part of the SH contribution provisions which satisfy the regs, so you couldn't change it mid-year.

If the SH match reduced the prevailing wage contribution, I would probably feel different about a mid-year change.

Anyone else have an opinion?