safe harbor match 401(k)

[Gudgergirl]

In a 401(k) plan that provides for a safe harbor match - does the plan have to say "This is/is not a safe harbor plan" (and be amended each year in which it is not such a plan) or may it say "This plan will be a safe harbor plan for any plan year in which the Employer distributes a safe harbor notice."

I was thinking that safe harbor plans that use the contingent notice for the 3% nonelective safe harbor contribution had to be amended each year to say they were or were not a safe harbor plan but that the rules was different for matching contributions.

Any help is appreciated!

[Tom Poje]

my understanding is the document drives everything, thus it must state whether the plan is safe harbor or not.

I think when safe harbors first came out, the document language was iffy to the point of saying "see the notice", but the IRS cracked down on that.

now I think basic documents give a definition of safe harbor with the ford "if", but it is also driven by an amendment, not the issuance of a safe harbor notice.

At different meetings the IRS has always said

if the document says it is safe harbor and you don't issue a notice, you have a failure to follow the terms of the document requiring you to issue a notice.

I sort of reversed the question and asked

What if you issue a notice but don't amend the document?

the response was: Plan is not safe harbor. you might have grievance issues with employees and how you resolve them is a different matter.

[Kevin C]

It depends on the document language. Our current VS document has an option on the adoption agreement where after providing a conditional notice, providing the supplemental notice triggers the 3% SHNEC contribution. I've seen other documents where an amendment is required to implement the SHNEC.

[John Feldt ERPA CPC QPA]

There is no such thing as a safe harbor match that is contingent solely upon the issuance of a participant notice being provided each year.

If a plan is going to provide a safe harbor matching contribution to avoid the ADP test and presumably the ACP test, the safe harbor match provisions must be in place in writing before the beginning of the plan year and a notice must be provided a reasonable amount of time prior to the beginning of that plan year.

Thus, as Tom also stated, for the plan to be a safe harbor match plan, some written plan document language or plan amendment language must say it is. A mere statement saying the plan might provide a safe harbor match - indicating no SH match occurs when no notice is provided, and a SH match is contributed if the employer provided the notice, should not be sufficient to satisfy the regulations as it places the safe harbor provisions outside of the written terms of the plan and into certain actions that are discretionary by the employer.

[Gudgergirl]

Thanks everyone!

[Gadgetfreak]

My understanding is that the Document must say Safe-Harbor Match (SHM) AND a notice must be given prior to 12/1 of the prior year. So this leads to a good question, what if you have the language in the Document but you didn't give the notice? My understanding is that you must still do the SH matching formula but you don't get an automatic pass for ADP. Would anyone like to comment on that?

[Jim Chad]

WFIW I believe you are correct.

[PensionPro]

I don't believe the plan becomes subject to ADP/ACP testing. You may have other issues if you did not provide notice in a SHM plan since an employee's deferral elections arguably depend on the information in the notice.

[John Feldt ERPA CPC QPA]

First, a minor point: the SH notice deadline is, according to the regulations, due within a reasonable period of time before the first day of the plan year. The IRS will not question a notice provided at least 30 days and no more than 90 days before the beginning of the plan year, but I have not personally seen them try to challenge a notice given 25 days before the beginning of the plan year. As long as the plan's written language itself did not require the 30 days, you have no operational error for giving the notice with less than 30 days to go, but you do fall outside the "we're definitely safe" zone, into the "I wonder what an IRS agent may think of this" zone. No big deal here.

Now to the real question:

What if you have the language in the document but you didn't give the notice?

You have an operational error. What does the plan say in it to fix operational errors? I'd bet it might mention the EPCRS program.

Anyway, the plan has failed to act in accordance with its terms. If you discover this problem just a few days after the beginning of the plan year, and if the employer is otherwise eligible for self-correction (has procedures and has reliance on the document language), then perhaps the employer could argue that this is self-correctable by merely giving the notice right away. If so, then document the error, document the steps taken to "fix" it and when it was fixed, and document the procedural change so it can be prevented from happening again.

If the employer does not think SCP is the way to go here, then they could submit a VCP application with their mea culpa and offer to the IRS something they think the IRS might agree with, almost anything can be tried here, and you won't know what they will truly accept until you show them all of the facts and explain the circumstances to them.

Maybe the worst option is for the employer to do nothing about it and play Russian roulette with the plan.

[Gadgetfreak]

I agree with your comments. But an SCP (or even a VCP with a mea culpa) correction could be to do the match formula (which is in the SPD so, theoretically participants know about it) but NOT to automatically pass ADP. I think that is reasonable and the "punishment fits the crime".

[John Feldt ERPA CPC QPA]

Maybe the punishment is the mere payment to the IRS for the VCP application.

Calendar year plan. Suppose the first payroll of the year is on January 31. The employer hands out the notice on the 2nd of January, just 29 days before that first payroll - yes it's too late anyway, regardless. What is the harm in asking the IRS under VCP to allow the plan to be considered as safe harbor for testing purposes for that year? Certainly they could say, "no way, Jose, we won't agree to the fix you presented here." But it seems reasonable to at least ask, and that certainly does not mean you must ADP test, perhaps they will agree with some other way to give the plan its fix for the year.

[Gadgetfreak]

You are too nice . I agree that, in the situation you described, it is reasonable to "ask". But as the year gets later and later, I feel more comfortable with doing the match and the ADP test - especially if they do SCP (and no IRS fees).

[PensionPro]

I don't see how a plan whose document states that it is going to satisfy 401k/m through safe harbor can retroactively decide to satisfy 401 k/m through testing. I recommend you read this page from the IRS web site. BTW the page was last reviewed 04/29/13 but they neglected to update the reference to the new Revenue Procedure. An excerpt:

"[The employer] must evaluate the impact of its failure to provide notice to its eligible employees. The solution might be different for each affected employee." (emphasis mine)

http://www.irs.gov/Retirement-Plans/Fixing-Common-Plan-Mistakes---Failure-to-Provide-a-Safe-Harbor-401(k)-Plan-Notice

[John Feldt ERPA CPC QPA]

Okay. I should also add that any steps taken should not further the plan's operational error.

For example, a document I am looking at does not default the plan into "test mode" for ADP purposes if the employer merely fails to give the SH notice. The document indicates that the employer can utilize EPCRS, including SCP, VCP etc. to fix any errors. Thus, it could be another operational error if the plan forged ahead, ran an ADP test, and just made refunds to the HCEs. In this document, the only way that could be correct would be if the employer, decided that was how EPCRS would have it fixed for that year. The actions to fix must also align with the document.

edit to say: Aw, PensionPro beat me to making that point.