3% Safe Harbor - Shareholder option

[Guest EricWings]

I have a law firm that has a 3% non-elective safe harbor contribution. Sometimes they have shareholders that are underwater on their annual draw and would like to be able to elect to receive or not receive the 3% safe harbor on an annual basis. Interested to know if anyone has designed a document that has received IRS approval or any other interesting suggestions. Thanks

[ETA Consulting LLC]

I'd run as far away from this as possible. It sounds as if they want the effect of a Cash Or Deferred Arrangement (which would effectively limit these amounts to the 402(g) limit). It must remain non-discretionary.

Good Luck!

[Kevin C]

It's too late to change the 3% SH for the current year. The document will say who gets it and you can't change that mid-year.

But, for next year you can sort of get there. Amend the plan before the end of this year, effective next year so that HCE's don't receive the 3% SH and the PS allocation is a new comparability allocation with each person in their own allocation group. The Employer sets the PS contribution levels, not the individual shareholders. Then, on a case by case basis, the Employer decides which HCE's get a 3% contribution. Make sure you check the document for how the PS contribution amounts are declared. Our VS document requires a resolution specifying the contribution amounts for each allocation group.

[rcline46]

CHange the document to NOT give the SH to HCEs, or at least not to partners. Only for 2012 and beyond.

[TPApril]

Similar situation, different employer type though...S-Corp with 1 HCE - the doctor. Due to his financial issues, he never put in his 3% safe harbor for 2010 for himself, but he did deposit for his staff on an ongoing basis. He has not put any to himself yet for 2011. Based on this thread of posts, he does not have a choice, is that correct? That being the case, I think he can still deposit the 2010 amount by 12/31/11. Also, I'm not sure if he ever gave out his safe harbor notice in 2009 for 2010. If not, would that change the necessity of depositing 3% to his account for 2010 or 2011?

As a minimum, I'm thinking he needs to be advised to remove himself from future safe harbor allocations, effective 2012.

[Kevin C]

If the document says the HCE's get the SH and he doesn't contribute for himself, the failure to follow the terms of the plan is a qualification issue. Since he is beyond the time period for his 3% SH to count as a 2010 annual addition [1.415©-1(a)(6)(B)], I would look to EPCRS for a correction. You are still in the time window to correct significant operational failures under SCP with a corrective contribution, assuming he hasn't been notified of an audit. I don't know if a VCP filing would give you any other options.

For 2012, it needs to be amended by 12/31 so that he doesn't get the SH. Otherwise, he will have the same problem for another year.

Unless the document says otherwise, failing to send out the SH notice doesn't affect whether the SH is due for the year. Our VS document does have an option for the conditional 3% SH where delivery of the notice controls whether the plan is SH for the year.

[TPApril]

Thanks for your reply. We will do what we can to advise him to make him whole as soon as possible. Now, more of an ethics questions re the role of the TPA. Dr. fails on a regularly basis to deposit 401k timely. He does not pay non-eligible expenses. I dont believe another tpa will take him, so I dont know if he is better off if we step down at this pt. Is it acceptable to advise him to correct his contribution issues (including the differences btwn SCP and VCP) and then terminate the plan? I also believe he will not want to pay for a determination letter upon termination if that route was advisable.

[Kevin C]

If you are advising him how to correct the issues with late deposits, deferrals and employer, and reporting the late deferrals correctly on the 5500, I don't think you have an ethics issue. I would make sure you are giving written advice, so you have a record for your files.

How late is he with the deferrals? If he isn't depositing at all, I can see pushing to terminate the plan before he gets himself in more trouble. But, if he is depositing deferrals consistently late, say a month or so, I don't think I would take that extreme an action. The situation has to be pretty hopeless before we recommend plan termination. We would charge for the extra time spent calculating the lost income for the late deposits and advise him of the issues. Eventually, a participant will complain to the DOL or the 5500 reporting will be noticed and he will get a call or a visit. My experience has been that the DOL is usually pretty good at convincing employers to deposit timely.

[Guest S. Pehur]

Do you believe the amendment to delete safe harbor for the highly compensated in 2012, can be signed on December 28th even though the highly's received the Safe Harbor notice informing them that they would receive the 3% for 2012 back in November 2011?

[401king]

Do you believe the amendment to delete safe harbor for the highly compensated in 2012, can be signed on December 28th even though the highly's received the Safe Harbor notice informing them that they would receive the 3% for 2012 back in November 2011?

Anything on the safe harbor notice cannot change after it has been distributed. Basically, no 'material' amendments can be made to a safe harbor plan for a subsequent year after December 1.

No, you could not exclude HCE if the notice has been distributed.

[K2retire]

Do you believe the amendment to delete safe harbor for the highly compensated in 2012, can be signed on December 28th even though the highly's received the Safe Harbor notice informing them that they would receive the 3% for 2012 back in November 2011?

Anything on the safe harbor notice cannot change after it has been distributed. Basically, no 'material' amendments can be made to a safe harbor plan for a subsequent year after December 1.

No, you could not exclude HCE if the notice has been distributed.

That's what I was always taught also. But the place I'm working now says you can change it during December, you just have to give a new notice. I'd love any cites either way.

[Kevin C]

Anything on the safe harbor notice cannot change after it has been distributed. Basically, no 'material' amendments can be made to a safe harbor plan for a subsequent year after December 1.

No, you could not exclude HCE if the notice has been distributed.

That may be your firm's policy, but that's NOT what the regulations say. The prohibition on certain mid-year amendments to safe harbor plans is here:

1.401(k)-3(e)Plan year requirement

(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 same kind of rule is in 1.401(m)-3.

[K2retire]

Thanks Kevin, that's exactly what I was looking for.