Amendment to Safe Harbor 401(k) Plan

[Guest Celtics]

My client wants to amend the plan document from 6 months of service for eligibility to 1 year of service effective March 1. The plan is a calendar year safe harbor 401(k). Can I amend the eligibility or this is not permitted due to restrictions on mid-year amendments in safe harbor plans? Thanks.

[ETA Consulting LLC]

The "only" way conceivable would be to have the amendment affect only those employees who are not currently eligible for the plan; and therefore may have not received a safe harbor notice. Any other way would appear to change what was previously communicated in the safe harbor notice. Given the likelihood that this may not have the desired effect, it would probably be a good idea to wait until the start of a new year.

Good Luck!

[cpc0506]

I do not believe you can change eligibility provisions unless you are making them MORE favorable.

[Kevin C]

Question 37 at the 2012 ASPPA Annual Conference DC Q&A session dealt with a mid-year amendment to make eligibility less restrictive. The IRS answer that it could be done as long as there was no effect on already eligible employees. The IRS representative did not explain what that meant.

You are wanting to go the other direction, which would probably negatively affect some already eligible employees. That IRS comment, although informal, indicates that at least some at the IRS might not look favorably on your amendment. At the very least, I would be concerned about 411(d)(6) issues if the amendment made some who were already eligible for the 2014 SH contribution no longer eligible for it. 1.411(d)-4 Q&A 1(d)(8).

As for mention of an amendment changing language in the SH notice, there is no written guidance saying that is the standard for judging mid-year amendments to SH plans. That idea comes from ASPPA. There is a lot of disagreement on this topic and unfortunately, it doesn't look like things will get any better any time soon.

I'm firmly in the camp that the mid-year amendment restriction is what the regulations say it is. To some here, that makes me overly aggressive on mid-year amendments. That being said,I don't think I would be comfortable recommending the amendment you want to do. I would suggest it be done at the beginning of next year. You'll have to decide for yourself.

[austin3515]

The standard is: Though shalt not make an amendment to any provisions related to the satisfaction of the safe harbor requirements. Who is eligible for the safe harbor to me is clearly related to the safe harbor provisions.

So, based on this, I should say "no loosening of eligibility restrictions", right? Once upon a time I may have said that based on my logic above, but now I saw OK. The EOB makes a good point which is that it would be "ridiculous not allow a plan to expand eligibility" because it so blatantly contradicts public policy. Sounds like the IRS applied that logic to their Q&A.

I'm with Kevin C on this, I'll amend very many things in a safe harbor plan. There was an earlier thread where I gave a fairly exhaustive list of all the things I would be comfortable amending so I won't restate them here.

[cpc0506]

Austin, would you change the profit sharing allocation method - from pro-rata to new comp if the plan had a last day requirement, since no employee is negatively affected by that and there is no cut-back.

[austin3515]

I would based on the fact that means of allocating profit sharing is not a plan provision related to the provisions of 401k whatever the safe harbor section is. I think it generally would negatively affect people even though it would not be a cutback. But in MY Safe Harbor notice, I took advantage of the regs offer to reference the SPD for certain other provisions, so the amendment does not change the content of my safe harbor notice (not that I think that would necessarily change my analysis). I don't like to handcuff my clients unless I am explicitly required to.

But I'm sure that is one of the more controversial amendments.

[cpc0506]

My concern is that, although the profit sharing allocation is not explicitly spelled out in the Safe Harbor Notice, the Notice does direct the participant to the Summary Plan Description in effect when the notice is provided.

So the participant believes, if there is a discretionary contribuiton for the year, it will be based on pro-rata allocation.

[austin3515]

^{I was trying to find my post where I wrote more about this, but if you just read what the regs say, thre is nothing to prevent such an amendment. The regs don't say "anything in the notice is off limits." In fact the IRS has said you can amend to add hardships which should have been in the notice.}

^{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. "}

^{In no way, shape or form does the profit sharing allocation method satisfy the rules of 401k12 or 401k13 or this regulation. It just doesn't. All of the controversy regarding this matter is NOT BASED ON A REASONABLE INTERPRETATION OF THE REGS. It is based on comments made by the IRS (yes, including their published notices, which however do not supersede the regs and do NOT say what is impermissible - only what is permissible ).}

^{I'm so tired of this topic.}