Safe Harbor Nonelective Plan

[12AX7]

Safe Harbor Plan uses a non-Safe Harbor definiton of comp for allocation of the SHNEC. The comp ratio tests fails. Can I use Rate Group testing, along with Profit Sharing allocations during the plan year to determine if the allocation(s) would otherwise meet 401(a)(4)? Or, would the definition of comp require an amendment for the SHNEC? Thanks.

[ETA Consulting LLC]

Safe Harbor Plan uses a non-Safe Harbor definiton of comp for allocation of the SHNEC. The comp ratio tests fails. Can I use Rate Group testing, along with Profit Sharing allocations during the plan year to determine if the allocation(s) would otherwise meet 401(a)(4)?

Sure, that would prove that the non-elective contributions are non-discriminatory, but does nothing to help you 'deem to' pass the ADP test.

Or, would the definition of comp require an amendment for the SHNEC? Thanks.

Given that you have two standards here: 1) Pass the ADP test; and 2) Show the Non-elective contributions are non-discriminatory, I would change the defintion of Compensation to ensure it meets a Safe Harbor. It defeats the purpose of SHNEC when you test the Compensation and have it to fail, resulting in you having to perform the ADP test anyway.

Good Luck!

[Tom Poje]

at the 2009 ASPPA Conference Q and A, the IRS response was

#62

The final QACA regulations require a QACA to use a safe harbor

definition of compensation for deferrals and employer contributions

as of plan years beginning on or after 1/1/2010. Does this also apply

to SBJPA (i.e., 401(k)(12)) safe harbor plans? If a plan uses unsafe

definition of compensation and then fails the 414(s)compensation

test, what is the remedy?

Answer

Under Treas. Reg. §1.401(k)-3(b), the safe harbor contribution under the "old style"

(i.e., 401(k)(12)) safe harbor must be based on "safe harbor" compensation, which

requires a definition of compensation that meets IRC §414(s) (with some limitations).

If the compensation used for the employer contributions does not meet these rules,

the safe harbor contributions are likely insufficient and the CODA (and likely the plan)

won't meet qualification requirements. The correction would be to make up the

difference in contributions using a §414(s) definition of compensation plus earnings for

all affected years. By the way, the compensation eligible for deferral in a 401(k)(12)

safe harbor plan does not need to be nondiscriminatory under §414(s), but only

reasonable. On the other hand, deferrable compensation for QACA purposes must

meet the §414(s) definition. See Treas. Reg. §1.401(k)-3(j)(1)(i), last sentence. (And

you might want to change the definition of deferrable compensation in the future.)

(A reminder that IRS response does not necessarily represent an actual Treasury position.

[ETA Consulting LLC]

This is good info, as my approach would have been to resort to testing:

1) You must follow the terms of the plan by making the contribution in the amount (and based on the definition of Compensation) defined in the plan.

2) If the definition of Compensation happens to fail 414(s), then you lose your safe harbor 401(k).

3) On what authority, under the terms of the plan, would there be to make additional contributions (in order to preserve Safe Harbor).

My first time hearing this 'informal' approach. I wish ASPPA would encourage them to provide something we can use: (i.e. something that one IRS office may accept while another one rejects isn't a good approach).

I do like the approach, but would like for it to be consistent.

Question, does that correction involve retroactively amending the plan to a safe harbor definition (or one that satisfies 414(s) )? Would this be under SCP or would a VCP application be required since it is a retroactive amendment?

This is what bothers me.

[Tom Poje]

well, it is somewhat informal. it is not informal in the sense a question is asked from the audience and they respond on the spur of the moment.

questions are submitted beforehand

so the IRS agents have a chance to review them.

then they meet with the ASPPA folks to discuss what their reoinse will be, etc.

I lean toward thinking they generally can be relied upon.

in this case, it makes sense (at least to me) for if the document says its safe harbor its safe harbor.

[ETA Consulting LLC]

well, it is somewhat informal. it is not informal in the sense a question is asked from the audience and they respond on the spur of the moment.

questions are submitted beforehand

so the IRS agents have a chance to review them.

then they meet with the ASPPA folks to discuss what their reoinse will be, etc.

I lean toward thinking they generally can be relied upon.

in this case, it makes sense (at least to me) for if the document says its safe harbor its safe harbor.

I don't disagree with you Poje. In the event someone from one of the IRS regional offices challenges it, you could actually show documentation where the IRS stated publically to a room of pension professionals that this was their approach. When looking at the rules, there are a few holes here. It would be 'nice' to get those addressed (for professionals who may not be affiliated with ASPPA).

[LANDO]

Wow, that seems risky. That would be violating the terms of the plan document at a minimum. Wouldn't the far safer approach be to do as ERISAtoolkit suggests above and test? Then if the allocation couldn't pass 401(a)(4) do an 11g which would allow for a correction of a failed 401(a)(4) test.