Safe harbor nonelective

[Belgarath]

Say a plan has a safe harbor 3% nonelective, and provides the 3% to all employees. If mid-year they decide they want to amend to provide only to NHC, can they do this?

Since the safe harbor regulations provide only that to qualify, you mst provide the SH for NHC, it would seem that such an amendment is permissible. However, I think you'd have to provide the 3% to the HC through the effective date of the amendment, give a proper notice, etc...

I've never actually seen such a request, but a question came up. Thoughts?

[Kevin C]

I would answer no, they can't do that. The plan provision saying who receives the SH contribution is part of the provisions that satisfy 1.401(k)-3, so you can't amend that provision during the year.

Here is a prior discussion:

http://benefitslink.com/boards/index.php?showtopic=41518

[Belgarath]

Hmmm, glad to see I'm not the only one who went through this thought process. Thanks for the link to the prior thread. Very interesting.

[QNPG]

Say a plan has a safe harbor 3% nonelective, and provides the 3% to all employees. If mid-year they decide they want to amend to provide only to NHC, can they do this?

Since the safe harbor regulations provide only that to qualify, you mst provide the SH for NHC, it would seem that such an amendment is permissible. However, I think you'd have to provide the 3% to the HC through the effective date of the amendment, give a proper notice, etc...

I've never actually seen such a request, but a question came up. Thoughts?

Prior to the proposed regulations issued May 18, 2009, there was no way to stop the safe harbor guaranteed NEC during the plan year, other than to terminate the entire plan. Effective immediately on May 18, 2009, a plan may reduce or eliminate the safe harbor NEC during the plan year, provided the following steps occur, and provided the employer has a substantial business hardship as defined in Code Section 412©. To do so:

The plan is to be amended to remove the safe harbor NEC provision.

The employees are to be provided a notice 30 days in advance of the safe harbor contribution being discontinued.

The employees must have a chance during the 30-day period to change their deferrals.

Prorate the 401(a)(17) compensation limit

Although safe harbor contributions are made for a portion of the year, ADP and ACP testing will apply for the entire year.

The proposed regulations also provide that the supplemental notice requirement is satisfied if each eligible employee is given a notice that explains:

the consequences of the amendment reducing or suspending future safe harbor NECs;

the procedures for changing CODA elections; and

the effective date of the amendment.

The reduction or suspension may be effective no earlier than 30 days after the notice is provided to all eligible employees. For a plan that is amended to reduce or stop the safe harbor contribution mid-year, when the safe harbor contribution is calculated for the portion of the year that it is to be provided (from the beginning of the plan year until 30 days after the notice is provided); the $245,000, 401(a)(17) compensation cap, must be prorated.

Further, since the safe harbor contributions were not made for 12 months, the plan will be subject to the top heavy rules of section 416. see below. Also, to reiterate, the plan is subject to ADP and ACP testing for the entire year.

The business must be incurring a substantial business hardship as defined in Code Section 412©:

"For purposes of this section, the factors taken into account in determining temporary substantial business hardship (substantial business hardship in the case of a multiemployer plan) shall include (but shall not be limited to) whether or not—

(A) the employer is operating at an economic loss,

(B) there is substantial unemployment or underemployment in the trade or business and in the industry concerned,

© the sales and profits of the industry concerned are depressed or declining, and

(D) it is reasonable to expect that the plan will be continued only if the waiver is granted."

This would apply to NHCEs as well as HCEs (or just HCEs)

[Belgarath]

Thanks, I was aware of this but the question I received didn't involve any business hardship. I should have specified this in the original post.

[Earl]

Sort of begs the question of why would someone have a SHNEC plan without using the maybe notice process. (Other than convenience for the TPA) Then this problem never comes up.

Always wondered about that.

[QNPG]

Sort of begs the question of why would someone have a SHNEC plan without using the maybe notice process. (Other than convenience for the TPA) Then this problem never comes up.

Always wondered about that.

Because of the administrative burden of having to amend all SH plans to add the provision at the end of every plan year.

[Earl]

I have a mail merge set up from my database that I run and print every year. Click click click - its real easy. Have to mail a notice anyway.

[K2retire]

And how does your mail merge do with collecting the signed amendments from all the clients?

[Earl]

I give them material. They want a qualified plan they follow my instructions.

There is no requirement that the TPA have a copy for it to be in place. Besides I usually talk to all of them in September/October/November anyway to be sure of their situation for this year and next. Its only a couple hundred people over 3 months - only takes a couple minutes on that issue. I would figure that is scalable for a larger company.

"I am going to lock you into a 3% contribution although I don't have to because I don't trust you to sign a piece of paper every year." Is that your sales pitch?

[QNPG]

I have a mail merge set up from my database that I run and print every year. Click click click - its real easy. Have to mail a notice anyway.

My experience has been with a larger firm where 900+ of the 2000 plans are SH and of those 900, more than half are 3% safe harbor due to new comparability profit sharing formula being used. Although we have to send a notice, it is pretty much the same information from year to hear (in the notice) so not much changes except for the limits. HOWEVER, the amendment to the plan, at least for us, is not that easy. I wouldn't recommend to any one to amend a document without thoroughly reviewing each amendment and last restatement prior to preparing such a change.

And then there's the signed copy back, etc...

We wish it was that simple.

[Earl]

The same attorney who prepared the VS prepared the SH amendment.

If you can't trust your attorney....