Corrective Amend within 9.5 Months to a Safe Harbored 401k

[ERISA1]

We had a Safe Harbor 401(k) plan in 2013. During that year we adopted a Cash Balance plan. It had started with an eligibility window that brought in Employee "A". ("A" is not eligible for the 401(k) Plan in 2013 as of the date of this post.) Turns out, the plans cannot satisfy the Special Gateway requirement because "A" did not get a benefit in the 401(k) plan. The perfect solution would be to adopt a corrective amendment within 9.5 months admitting "A" into the 401(k) plan and giving him the same 7% as all others.

Question: Would a corrective amendment that admits a new participant constitute an impermissible (mid-year) amendment of a Safe Harbor plan? I think it is permissible because it does not conflict with anything in the 2013 Safe Harbor Notice. It is also the kind of amendment that IRS says it would be inclined to permit (but to my knowledge, they have not yet expressly permitted). What do you think?

Thank you very much.

[John Feldt ERPA CPC QPA]

I assume A is a NHCE. If so, then it seems okay to do this in my opinion. You are not changing the safe harbor provisions. You are not taking away anything that the existing participants would have otherwise received. The plan needs to satisfy nondiscrimination somehow, so giving this NHCE an allocation, as described, satisfies and is the purpose of 1.401(a)(4)-11g.

Technically, you open the eligibility for that participant for the nonelective profit sharing only, and if you want to limit that only to the year ending 12/31/2013, you could do that as well, making not eligible in 2014. But if you'll need them in the design for 2014, then you could just let them in and keep them in.

[Tom Poje]

along similar lines, Q and A #37 and #39 from the 2012 ASPPA Conference

Q: A safe harbor 401(k) plan covers only salaried employees
of Company X. The plan passes the ratio test under IRC
§410(b). The plan year ends December 31. In June, X
decides it would like to open up the 401(k) plan to the
hourly paid employees, effective on July 1. Would this
amendment be a violation of IRC §401(k)(12)?

Proposed Answer

No. Although certain amendments to a safe harbor
401(k) plan are not permitted to be made effective on
a date other than the first day of the plan year, this is
not one of those types of amendments. The
amendment solely applies to employees who are not
otherwise covered by the plan. The safe harbor rules
simply treats these individuals as newly eligible, and
the safe harbor notice provided prior to the beginning
of the plan year would not have had to be distributed
to these employees before July 1.

IRS Response: The IRS agrees with the proposed answer as long as there is no
effect on the already-eligible employees.
.............

Q:
A safe harbor 401(k) plan fails the §410(b) coverage with
respect to its profit sharing plan component. Within 9-1/2
months after the close of the plan year, the employer
adopts a corrective amendment, pursuant to Treas. Reg.
§1.401(a)(4)-11(g). Does this amendment cause the
401(k) component to lose its safe harbor for the plan year
in which the corrective amendment is adopted?

Proposed Answer: No. Regardless of the position taken by the IRS with
respect to amendments made to a safe harbor 401(k)
plan, an implied exception exists for any
amendments that are necessary to correct a violation
of the nondiscrimination testing rules, which is a
fundamental requirement for a qualified plan.

IRS Response :The IRS agrees with the proposed answer

[Guest wickedp1]

If a plan provides for a Safe Harbor Nonelective contribution, can you amend the plan during the year to change the allocation classes for the non Safe Harbor profit sharing portion of the plan? I have a client that would like to put everyone in their own allocation class (new comp) plan, primarily to allow certain doctors to opt out of receiving an allocation. The profit sharing is discretionary, so I wouldn't think an accrued benefit would be taken away.

[John Feldt ERPA CPC QPA]

Some say this is a questionable amendment. Others would ask more questions, such as "Have the participants satisfied the allocation conditions for the plan year already?

[Guest wickedp1]

Thanks for the reply John, Most of the participants would have satisfied the 1000 hour condition by this past July. However, don't you have until the end of a plan year to amend rate groups? The amendment would be for the 2014 plan year's allocation, and be adopted on October 1st. If this amendment can be made, then my question is if this "mid-year" amendment is permissible in the SH NEC plan.

[John Feldt ERPA CPC QPA]

Does the plan have a last day requirement for accruing a benefit? If not, then they should receive allocations that meet the current allocation formula. What is the current allocation formula? Pro-rata? Integrated?

[Tom Poje]

if you had a last day rule for profit sharing, then you can amend anytime because no body has accrued a benefit yet. if there is no last day rule then you couldn't amend to change the formula
................

my gut feeling is no you couldn't change based on the IRS last comment
at the ASSPA 2012 conference, when asked if you could amend a safe harbor to let new people in, Q 37
A safe harbor 401(k) plan covers only salaried employees
of Company X. The plan passes the ratio test under IRC
§410(b). The plan year ends December 31. In June, X
decides it would like to open up the 401(k) plan to the
hourly paid employees, effective on July 1. Would this
amendment be a violation of IRC §401(k)(12)?
Proposed response: No. Although certain amendments to a safe harbor
401(k) plan are not permitted to be made effective on
a date other than the first day of the plan year, this is
not one of those types of amendments. The
amendment solely applies to employees who are not
otherwise covered by the plan. The safe harbor rules
simply treats these individuals as newly eligible, and
the safe harbor notice provided prior to the beginning
of the plan year would not have had to be distributed
to these employees before July 1.
The IRS agrees with the proposed answer as long as there is no
effect on the already-eligible employees.

.......

as a side bar, I was told our document provider indicated don't even bother submitting a restatement with mid year changes to a safe harbor plan.

[John Feldt ERPA CPC QPA]

Tom,

What if the safe harbor covers only the over age 21/1 group and you want to amend the portion of the plan that affects only the under age 21/1 group? Would your document provider really not allow that? Seems okay.

[Tom Poje]

I'm not the one who does the document stuff so I don't know. that is just what I was told.

It might be you would amend for something like that and then restate.

[Guest wickedp1]

Ok, here is further detail on the plan and their intent:

Currently, the plan is cross-tested, and has multiple allocation classes (Equity Providers, Non-Equity Providers, and all other employees). There is a last day/100 hours requirement. Additionally, the Plan allocates a 3% Safe Harbor Nonelective contribution. The Profit Sharing is discretionary, and the client decides whether they want to allocate a contribution after the plan year end.

The client wants to amend the plan during the 2014 plan year so every participant is in their own rate group. The current allocation formula is pro-rata, but that wouldn't matter anyway if everyone is in their own rate group.

The plan's Safe Harbor notice does not describe the allocation classes (I am not sure if it has to).

My interpretation of Tom's post form the ASPPA conference is that the discussed mid-year amendment doesn't affect the already eligible employees. I would think that changing a discretionary profit sharing allocation rate class would not affect eligible employees, since the client is not required to determine the contribution until after the close of the plan year anyway.

Tom, would you still agree that amending the Safe Harbor plan mid-year to change the rate groups is considered impermissible? We would just amend mid-year, and not restate until the upcoming period.

[Tom Poje]

I was at that ASPPA conference and had seen the Q and A before the session.

I asked one of the folks from Corbel about that particular question pointing out that the response said "as long as their is no effect on others" and asked him "If they make a profit sharing that would effect the existing group because they would now get less"

His response was something like "Don't even raise the issue at this time. We are happy we have gotten them to at least open up the possibilities for amendments at this point"

I am far from an expert on documents and amendments as stuff. Based on the IRS responses that you really shouldn't be making changes, I have misgivings about changing a profit sharing formula (as opposed to something like changing something that has no real change ...e.g. who head the trust or whatever.0

from a participant's point of view, let's say the ps contribution has been pro rata at 7% for years. now you amend to cross testing so the NHCEs will get only 5% (and the HCES max out). I could see an NHCE saying "I would have deferred more if I had known there was a possibility the usual ps was going to get cut back"

[John Feldt ERPA CPC QPA]

Of course, the amount was discretionary before the plan year started, and it is still discretionary. No change is happening there mid-year.

No cutback occurs when putting each person in their own class because the plan has a last day requirement.

With that, some would then say that such an amendment does not violate the final 401(k) regulations, and then they would caution you that it might perhaps violate the personal view of some IRS agents regarding the interpretation of those regulations, but that's not everyone's view.

I think the IRS intends to write guidance about what changes are permitted mid-year for SH plans.

[Guest wickedp1]

_{Thanks Tom and John! I appreciate your feedback. The funny thing is that the client wants to amend the plan to new comparability for two specific reasons:}

_{1.) Two of the owners do not want to receive a profit sharing allocation, and they are currently in rate groups where they would have to receive an allocation because others in their group want to receive an allocation.}

_{2.) To give two younger NHCE's a slightly larger benefit so the plan passes 401(a)(4).}

_{Their intent is to keep the formula the same as in the past (maximize partners while giving everyone else 3% SH and appropriate gateway)!}

[John Feldt ERPA CPC QPA]

That's great. Again, from a document standpoint, the profit sharing is "discretionary". It doesn't matter if the employer did 7% per year since the document does not say "7% per year". Changing the groups or the conditions does not make the amount become 5% or 7% or 0%, it's still "discretionary". That's not a change since it's still an employer decision, just as it was before.

In fact, if each person is now in their own class, nothing is stopping the employer from allocating the same amounts/percentages the same way they always did before (assumes passes testing). Again, that's because it's always been discretionary and is still discretionary.

You have been advised however, that some tread very, very, very cautiously with regards to this topic.

[Tom Poje]

agree with all the comments. until the IRS will actually tell us, it is a ' proceed with caution'

otherwise why did they put in a special rule that says "yes you can amend to add a Roth feature", but any other amendment you can add with no problem at all.

I agree you would think a discretionary with a last day rule could be modified, and maybe someday our grandkids will know the answer to that....

[Guest wickedp1]

It's crazy how vague the IRS can be with their stances and interpretations. I guess that is what makes our line of work so interesting, at least for me.....

Hope you both enjoy the weekend!