Plan Loan

[Guest Hgreer]

It has been suggested that if a plan is Safe Harbor and does not allow loans and subsequently the trustee decides within that plan year to add a loan provision you would have to wait until the next year. Any truth to this?

Thanks,

Hal

[Tom Poje]

this hinges on what many refer to as the 'stupid rule' in the regs 1.401(k)-3(e) which says ..."a [safe harbor] plan...will not satisfy the requirements ...if it is amended to change such provisions for the year"

the IRS has taken a firm position that means pretty much changing anything, despite the absurdity of such a stance on certain items.

I even discussed this with one of the lawyers at Corbel and he confirms that is indeed the IRS stance. ASPPA has been working hard to get that changed. This was in regards to some of the Q and A's at the ASPPA Conference a few years ago. He indicated they were happy to get the IRS to agree to a few items, taking what they could get so they could work on more.

If you look at the recent notice 2013-74 on Roth Rollovers it said 'yes, you can add an in plan Roth provision, but only for a limited time. So if the IRS would say you can do that for only a limited time in regards to Roth rollovers why would they permit modifying to add a loan at any time?

Q 5 (b)

In accordance with § 1.401(k)-3(e)(1), this notice provides a temporary period during which sponsors of safe harbor plans are permitted to make a mid-year change to provide for in-plan Roth rollovers of otherwise nondistributable amounts. The period ends December 31, 2014. Thus, in the case of a § 401(k) safe harbor plan that has a calendar-year plan year, in order for the plan to permit an in-plan Roth rollover of an otherwise nondistributable amount during 2013 or 2014, a plan amendment providing for that option must be adopted by December 31, 2014.

.................

I think one of the issues might be the safe harbor Notice. there is no provision in the regs for issuing a new notice for any changes. The notice is suppose to include distribution provisions, and a loan is indeed a type of distribution, so you would be changing something from the notice.

Is the whole thing silly? well, that is not the point, and others on this site will claim the IRS doesn't really take the strict stance.

[Guest Hgreer]

Thank you for the insight. I was wondering why someone was taking this position and your explanation helps explains why. Thanks for taking the time to answer my question, most appreciated.

Hal

[Tom Poje]

At the 2010 ASPPA conference the following was asked (first question on page 5 of the handout)

(a reminder that such responses do not necessarily reflect an actual Treasury position)

Q. Have the 401(k) Treasury regulations been changed to allow a safe harbor

401(k) plan to be amended during the plan year to allow for provisions other

than Roth and hardship withdrawals? What liability does the TPA have in

the event the client and/or their advisor insist that the plan be amended

even though they have been advised of the regulations?

A. Regs have not been changed. The plan will fail the safe harbor requirement.

.........................

I mention this because others take a more liberal stance and would say you 'can' or at least 'should' be able to make changes. I'm of the conservative nature and would exercise caution in the matter. do I think they will eventually change their stance? Yes, but that is neither here nor that at the moment.

e.g. that the regs saying no changes can be made should be interpreted as "to the safe harbor formula". or "If you change something not pertaining to the safe harbor formula, then issue a new safe harbor notice". but we shall see.

[K2retire]

... but we shall see.

If we live long enough!

[Guest Hgreer]

Thanks again Tom!

[John Feldt ERPA CPC QPA]

I am curious to see if any Benefitslink readers would care to add a post to this to indicate how many times an IRS audit of one of their plans has gone into audit cap sanction negotiations due to a plan amendment done to a safe harbor plan for an amendment that was not prospectively effective starting on the first day of the next plan year). If the IRS has a strict stance, I am sure the IRS has found this and enforced it on quite a few plans, right?

[Tom Poje]

at the moment the only comments I have seen are "Is it worth taking the risk"

or, as the following says, "if you do..."

http://thebenefitblog.files.wordpress.com/2013/02/feb-11-2013-when-can-you-amend.pdf

............

again, I think most, if not everyone, disagrees with the silly thing. but does that give you 'permission' to act otherwise

[Belgarath]

I have heard discussion of this with regard to Safe Harbor matching plans, to the effect that, "if the participant knew in advance that loans would be allowed, it might have had an effect on whether, or how much, they deferred. So adding it mid-year isn't permissible."

I think there are very few people who don't think the IRS stance on this whole subject is generally unreasonable, but as Tom points out, how much risk do you (or your client) want to accept?

Certain amendments I believe are less risky than others. For example, a plan excludes a class of NHC. They decide mid-year that they want to amend the plan to allow them to enter. I have a hard time believing that the IRS would impose sanctions on a plan for this - BUT, who knows?

[John Feldt ERPA CPC QPA]

"but does that give you 'permission' to act otherwise"

Action should be within the law and its guidance. But verbal statements by agents "you can't do any amendment" is not found in the law or its guidance (IMHO) and does not deny permission to take reasonable actions.

[BG5150]

"if the participant knew in advance that loans would be allowed, it might have had an effect on whether, or how much, they deferred. So adding it mid-year isn't permissible."

How is that any different from a "regular" 401(k) plan.

[John Feldt ERPA CPC QPA]

Applying logic to analyze the IRS position? Maybe that should be posted in humor?

[Belgarath]

Didn't say it was any different...just that this general line of thinking has been advanced in some quarters to rationalize the IRS stance on the subject of mid-year amendments in safe harbor plans.

[Tom Poje]

Belgarath:

I thought about the issue of letting in a class of NHCE previously excluded, and at the ASPPA Conference they seemed to give a nod that was ok.

but what wasn't addressed was what happens if an employer was made.

allocating $50,000 amongst a group of employees that now includes employees who weren't previously eligible (especially if this included a discretionary match used to satisfy safe harbor) is really opening a can of worms.

I realize there is no problem changing eligibility in a 'regular' plan, but the concept of the safe harbor was "we are giving you a free ride on ADP testing" and thus the ultimate reason (I think) for the IRS stance that things shouldn't change.

[Kevin C]

Provisions that might have an effect on participants' decisions to defer is an impossible standard to determine.

I recently came across a discussion in the EOB that I think applies here. The discussion is regarding the Gold memos dealing with abusive 401(a)(4) designs. Sal questions whether the IRS has exceeded its authority on the issue and points out that even under their regulatory authority, the Administrative Procedures Act requires proposed regulations and a public comment period before rule changes can be made.

The regulations 1.401(k)-3 and 1.401(m)-3 are very clear about the types of amendments that can not be made to safe harbor plans mid-year. If the IRS wants change that to prohibit virtually all amendments to SH plans, there are rules and procedures for them to follow when making changes.

[Belgarath]

Hi Tom - interesting point. But for simplicity and using the morre common situations, lets say that the SH is either the 3% nonelective or the usual SH match. At least in my experience, this would typically be true. I think it would be very unreasonable to impose sanctions in such a situation. But...

[Tom Poje]

I don't disagree. It is still our job (or at least my job) to warn the client that any changed may be problematic.

the contribution issue is the very one I asked one of Corbel's folks about at the conference a few years ago, and he said don't even raise the issue -they were happy making some in-roads.

I see the most recent ASPPA letter for guidance is dated 10/17/2013. I think roman numeral III is the main one we are all asking!

http://www.asppa.org/Document-Vault/PDFs/GAC/2013/101713comm.aspx

[Kevin C]

Geeze, you had to ruin my Friday afternoon by bringing up that letter? (Where is that head banging smiley face when I need it?) ASPPA actually recommends changing the standard for prohibited mid-year amendments to amendments that would affect wording in the safe harbor notice. And all this time I thought they were working FOR us. If you make it to section IV, you will see them asking the IRS to confirm that amending to change the employer's address or phone number or to replace a Trustee are not prohibited mid-year. After speaker comments at the 2012 annual conference that it was ridiculous to think anyone with ASPPA ever said you couldn't change an address, phone number or Trustee mid-year, I thought that issue was laid to rest.

Those of us who were around when safe harbor 401(k) first became an option should remember that at one point the IRS actually made rule changes with the stated goal of making it easier for employers to adopt and administer safe harbor 401(k)s and to ecourage them to adopt these plans. I'm referring in particular to Notice 2000-3. Those changes were incorporated into the final regs. How in the world did we get from that to having ASPPA asking the IRS to impose a huge disadvantage on SH plans?

(Rant mode off)

[Jim Chad]

Ditto, Kevin. (That was a nice rant. I couldn't have said it better.)