Amending a Safe Harbor Plan

[austin3515]

I know this has been done before, but I think it's good to keep talking about it

Safe Harbor Plan has no profit sharing option. Am I barred from adding a profit sharing feature? I know the IRS has taken a hard-line interpreting the 401k regs regarding amending SH Plans, but is there anything beyond public statements from IRS officials supporting that strict of an interpretation?

I'm aware of the notice that was released regarding the permissibility of adding hardships and Roth, but that notice left the door open for other changes as well.

　

[ETA Consulting LLC]

The key is the wording of the safe harbor notice given to employees before the beginning of the year. If your plan, as designed, did not include a PS feature, then the notice wouldn't have mentioned it. So, you would be precluded from amending the plan in a way that would change the language on the notice that was issued.

There may be a few caveats to this, but it's the general approach.

Good Luck!

[Tom Poje]

agreed

Q39 from this year's ASPPA Conference

Give the IRS credit, they have been consistent on their answer.

I did not attend so I do not know what was discussed.

My client wants to change to a more liberal eligibility period under a safe harbor plan, where the

safe harbor contribution is a nonelective contribution. The employer doesn't want to wait until the

beginning of the next plan year. Would it be permissible to make the amendment effective during

the year, since it doesn't affect elective deferral decisions by currently eligible employees?

Would the answer be different if the safe harbor contribution were a matching contribution?

Our answer. We did not provide an answer.

IRS response. Presently the only exceptions for changes during the year are those identified in Announcement 2007-

59. The IRS will discuss this issue further from the podium.

[John Feldt ERPA CPC QPA]

Suppose the safe harbor plan is found to have failed some test after the plan year just ended: either 410(b) or 401(a)(4). Would an amendment under 1.401(a)(4)-11(g) be verboten because the plan is safe harbor? If you fail, no -11(g) option for SH plan: too bad, tough noogies, bah humbug? Or do we say that the 12 months are over and the provisions were in place for the whole plan year, thus making the plan now open game to be amended retroactively? Rhetorical questions only, I know, expecting a reasonable approach may be asking a bit much.

[Tom Poje]

maybe the difference would be 'discretionary' vs ' required'

if you fail some other test you would be required to correct. and certainly there is no problem amending for changes in the law.

[austin3515]

IRS response. Presently the only exceptions for changes during the year are those identified in Announcement 2007-

59. The IRS will discuss this issue further from the podium

Am I crazy, or is this just a false statement. 2007-59 only says that a plan will not be deemed to have impermissibly amended the plan soley because they amend for Roth or hardships. They did not say "and anything else will be deemed to violate that rule." In fact, they lend credence to the interpretation that certain amendments are OK.

For the eligiblity question in the cited Q&A, I think that there is a very clear argument that that amendment affects the safe harbor provisions because it changes who is eligible to receive the safe harbor. But by adding profit sharing, I'm not changing anything related to the safe harbor.

And realistically, would a plan really be disqualified/penalized because an employer wanted to give their employees more money?

[Tom Poje]

there are lots of things that really have little to do with the safe harbor portion, but it still doesn't change the IRS response.

ASPPA has requested some permissible changes, but the IRS has still not provided anything further than 'not at this time' or 'future guidance coming'

see the following ASPPA request, and that goes back a few years.

http://www.asppa.org/document-vault/pdfs/g...shplanspdf.aspx

[Kevin C]

IRS response. Presently the only exceptions for changes during the year are those identified in Announcement 2007-59.

I agree that statement is false. The announcement says those specific amendments do not violate the regulations. It does not say those are the only amendments that can be made. The discussion about tying the ability to amend to whether or not it would change information in the safe harbor notice comes from the 2010 DC Q&A session. The regulations say that provisions that satisfy the rules of 1.401(k)-3 or 1.401(m)-3 can not be amended mid year, except under the suspension provisions included in the regulations. If you twist this around to make it mean that nothing mentioned in the SH notice can be changed, then you can't even update the employer's address in the document if they move mid-year, since it is required to be on the notice.

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 regs and the Announcement are all the guidance we have. The IRS has been clear that they will not issue further guidance.

[austin3515]

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.

Thank you for providing the reg citation. I think it underscores beautifully another wild interpretation of a simple rule that has wide spread and dire implications for the retirement plan community. I am of course adding this to the list that includes the fact that forfeitures cannot be used for Safe Harbor Contributions. I don't know who is to blame for all of this non-sense, but I'd like to have a word with that person!!

[12AX7]

As Dr. Evil would say, "Why must I be surrounded by frickin' idiots?"

[austin3515]

Oh and I forgot about the recent Q&A where they indicated that prime + 2 is what loans should bear for interest. Because for the last 30 years, prime plus one has wreaked havoc all across the country. That extra 1% will really save the world...

[12AX7]

Let's not leave out some of the DC TH rules !

[austin3515]

Oh I agree, but at least a plain reading of 416 makes it clear that the top-heavy rules are what they say. I'm talking about these people from the podium who are essentially writing new laws.

[DMcGovern]

Oh and I forgot about the recent Q&A where they indicated that prime + 2 is what loans should bear for interest. Because for the last 30 years, prime plus one has wreaked havoc all across the country. That extra 1% will really save the world...

While I certainly do not disagree with any of the concerns in this thread, I believe Bird did clarify in a different post that the IRS phone forum stated that prime plus 2% would be acceptable or reasonable (something like that). Not that prime, or prime plus 1% is unreasonable. Sometimes the statements from phone forums and IRS Q&A sessions need to be taken with the proverbial grain of salt.

[austin3515]

OK, I see I over-stated, but I've read at least one article suggesting that participant loans should increase to prime plus 2% based on that comment. The point is there is a disregard for the vast implications of their every whim.

[DMcGovern]

OK, I see I over-stated, but I've read at least one article suggesting that participant loans should increase to prime plus 2% based on that comment. The point is there is a disregard for the vast implications of their every whim.

You are absolutely right! Seems like the last couple of years have been particularly troublesome in that area

[austin3515]

http://us.select.mercer.com/blurb/223522/t...z-ZD01NjczMzY2/

Here's an article from Mercer advising prime + 2%. So, you can say it was "just a comment" but of course it is causing unnecessary attention to be directed towards excruciating minutae (to quote Elaine Benes )

[DMcGovern]

http://us.select.mercer.com/blurb/223522/t...z-ZD01NjczMzY2/

Here's an article from Mercer advising prime + 2%. So, you can say it was "just a comment" but of course it is causing unnecessary attention to be directed towards excruciating minutae (to quote Elaine Benes )

I agree - it seems that the Sponsor will either have to act as a loan officer and fully document how the interest rate was arrived at, or use the IRS' new deemed safe harbor rate of prime plus 2%.

Odd that our plan document provider (and others I have seen) actually provide choices like prime, prime plus 1% or some arbitrary flat rate. Suppose that will change with the PPA restatements?

[austin3515]

Until this rises above an informal Q&A, I'm ignoring this.

Maybe I'm a cowboy, but I've got much bigger compliance fish to fry (i.e., fee disclosures)