Another Safe Harbor Question

[imchipbrown]

Looking at adopting a safe harbor method (3% nondiscretionary) in an existing 401(k) Plan. I can't interpret Notice 2000-3 to my own satisfaction. Section III A-1 seems to be saying that if you amend in the current year, you still have to pass the ADP for the year. So what good is vesting a 3% contribution when it's useless in the current year.

It looks like A-9 lets you off the ADP testing hook if you get notices out before May 1, 2000.

Thanks for comments.

[Guest rhp]

Q&A1 sets out the general rule for a 401k changing to the safe harbor. Q&A9 has special rules for certain 2000 plan year cases. The next to last paragraph in A1 refers to A9. So if you post the notice by May 1 (and meet the other requirements) an employer can make a final decision later in 2000 to go under the 3% nonelective safe harbor option.

[imchipbrown]

Here's what I'm not clear about. I'll give a specific example:

Employer currently maintains a 401(k). The Plan is Top-Heavy, so for the HCEs to defer, they must put in 3% regardless.

I say, let's make the 3% fully vested. Then we can call it a Safe Harbor nonelective contribution, satisfy Top-Heavy, and HCEs can basically defer anything they want.

But wait. A1 says "a plan that provides that it will satisfy the current year ADP testing method.."

The Plan in question uses prior year testing. Even were this not the case, the above sentence seems to imply that the Employer, in the year making the switch, still needs to satisfy the ADP test.

Or, like I say, I'm having a dickens of a time understanding this wording.

[Guest rhp]

Chip, can't the plan operation (properly documented) be changed to use the current year method for 2000? I know that electing current year does place restrictions on returning the prior year. Maybe that is the price the IRS is extracting here?

Isn't there also a special rule allowing switching between current year and prior year during the remedial amendment period?

[imchipbrown]

I'm still wondering whether that buys me anything. If I say we'll satisfy current year ADP, does that mean I have to do a "traditional" ADP test for 2000 (which may or may not be better than 1999's numbers), or is the Safe Harbor in effect for 2000?

[Guest ndt123]

As long as your plan provides that you will use the current year method and you give a notice saying you might use the 3% safe harbor, you can avoid testing as long as a supplimental notice is given 30 days prior to the end of the year.

You do not have to test if you choose to satisfy the safe harbor in this manner.

[imchipbrown]

Thank you for the answer. How about if you just bite the bullet and say "We WILL make a 3% vested non-elective contribution each year". I think the supplemental notice would go out the door.

Any opinions on whether an annual notice would be required?

[Alf]

An annual notice is always required in order to use either of the safe harbor formulas. See Section V. A of 99-52.

Back to your earlier questions . . . The safe harbor method is one of the four (I think that is all) methods that is available to satisfy the ADP test (current, prior, SIMPLE, and safe harbor). If you utilize the supplemental notice method in A-1 of 00-3 you are using the safe harbor method and you do not need to run the ADP test. The reason that the current year requirement is included in A-1 of 00-3 is to prevent problems with double counting. If a plan that uses the prior year method decides for one year (say 2000) to use the supplemental notice provision in A-1 of 00-3, there are issues about how those QNECs would be treated in 2001 if the employer does not use the supplemental notice methodin 2001. The IRS avoided having to deal with issues about double counting the QNECs (in 2000 and 2001)by requiring that employers use the current year method to be eligible for the supplemental notice provision. That way, abuse of the system will be policed by the rules in 98-1 that prevent you from switching from current to prior year methods except in limited circumstances.