Document Drafting Error Enhanced Safe Harbor Match

[Susan S.]

A 401(k) document says that the basic safe harbor match is to be calculated on compensation for the plan year, but the enhanced safe harbor match is to be calculated on compensation and deferrals per payroll period. This was a drafting error and they both should have been coded for compensation for the full plan year. The employer is making an enhanced SH match and intended to calculate on an annual basis and has been operating that way for years. What is the best method of correction? Can an amendment be prepared to cover the prior years stating that there was a drafting error? Please help me out of this mess.

[ETA Consulting LLC]

I would look at the SPD and safe harbor notice to see if the inconsistency in the language in reflected there. This is merely 'defining the entire problem'. Should be problem exist only in the plan's document, then you can take one of two basic approaches: 1) The conservative approach, would be a VCP filing to explain the typo and allow for a retroactive amendment to eliminate the erroneous language; 2) would be to argue that your interpretation is that the SH match is calculated on full year compensation in all instances and draft a 'clarifying amendment' to that extent.

There is actually legal precedent for a plan sponsor to amend a plan to change the language for purposes of better clarifying their intent (with the argument that you are not actually changing a plan provision). There was a court case many years ago when an employer did this and was sued by participants for a cut-back issue. The courts rules that the a) The employer (as plan administrator) as the sole authority to interpret the provisions of the plan; and b) The employer's interpretation of the original language was 'reasonable'. c) Therefore, the plan's provisions were not amended, but the language was merely re-written to better clarify the way the provisions are interpreted by the employer.

Good Luck!

[Susan S.]

ERISAtoolkit, thank you so much for your reply! Unfortunately, the language is in the safe harbor notice and SPD. Does that rule out the clarifying amendment as an option?

[ETA Consulting LLC]

This is still debatable. The case I remember reading was pertaining to a DB plan where the impact was to benefits already accrued. Being a DC plan, the Contributions made each year are typically made with respect to Compensation for that year. I say that to suggest that if you were to consider this option, it would be a change in the language effective at the beginning of the next Plan Year (it doesn't have to be retroactive). In the meantime, the employer (as plan sponsor) maintains that this is how they interpreted (and continue to interpret) the plan. They are merely changing the language to clarify what was always interpreted.

The concept of interpreting the documents of the plan is 'flexible'. Even the courts have ruled that the interpretation doesn't have to be the best interpretation, but it must be reasonable. In this instance, the language in the plan expressly gives the Plan Administrator the sole authority to make the interpretation. The IRS, typically, states that they are fine as long as the interpretation is not 'arbitrary and capricious'. Arguably, this provides a little relief since you have consistently applied the provision in the same way. Now, had you did the calculation annually in one year and by payroll during another (while changing in an arbitrary manner), this would not be the case. For comfort, you can file VCP. I've seen intepretations (by attorneys writing legal opinions) that pushed the envelope much further that this. At the end of the day, your "client" has a decision to make.

Good Luck!

[Susan S.]

Thanks again! You have no idea how much I appreciate it.

[MWeddell]

Seems to me that you should encourage your client to discuss the matter with legal counsel, given that there is not a clearly valid method of self-correction available.