Safe harbor "maybe" plan - amendments

[Belgarath]

Taking an informal poll. Assume a safe harbor nonelective, utilizing the "maybe" provision. The plan currently uses a non-integrated profit sharing formula, with a last day/1,000 hour provision.

If the client wishes to amend to a new comparability formula, for example, can they:

A. do it at any time prior to the plan formally electing/adopting the SH contribution for 2015, or

B. must they wait until 2016 to have it effective?

[Bird]

We've been making them wait until 2016...for the most part. Every once in a while we might do a change in groups (since it is not changing the SPD), but going from pro-rata to something else is pushing it, IMO. You could adopt a new plan and then merge as of 1/1/16.

[Kevin C]

I doubt it will surprise anyone, but I pick door A. There is nothing in published guidance prohibiting mid-year changes to the PS allocation method simply because the plan is a 401(k) SH. While I have heard some ASPPA speakers claim there is a total prohibition of mid-year amendments to SH plans (except for published exceptions), I've never heard anyone with the IRS make that claim. Quite the opposite, we have a growing list of mid-year amendments to SH plans that the IRS has informally stated are ok.

If you read 1.401(k)-3(e)(1), it is very specific about what provisions can not be amended mid-year. It is also clear that adopting an improper mid-year amendment means that the plan does not satisfy 1.401(k)-1(b), which is a qualification requirement. If the IRS has really taken the draconian position the ASPPA speakers claim, there should be thousands of disqualified plans by now.

[ETA Consulting LLC]

I'm with Kevin C on this one. Over the past few years, we've beat this one to death

Good Luck!

[rcline46]

If the plan is a 'maybe' or 'contingent' plan, then it is NOT a Safe Harbor plan until the notice or even maybe the actual amendment is done in December.

If it is not a safe harbor plan, then I see no problem with ANY amendment until the special safe harbor amendment is executed.

[Bird]

Just to clarify my answer, my understanding of the IRS' concern is that participants might (theoretically) make decisions based on the contents of the SH notice, and they don't think the contents should be changed. While allocation formulas are not in our notices, they do reference the SPD, which contains the formula. I'm definitely not one who thinks that only the things on the "permitted" IRS list can be changed, but I do believe that this is what they don't think should be done. If it is not aimed at that, then what is it aimed at?

And I don't think it takes a terribly narrow reading to say that it doesn't matter whether it is a "maybe" notice or not.

Treas. Reg. §1.401(k)-3(e)(1): “Except as provided …, a plan will fail to satisfy the requirements of section 401(k)(12) … 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 [the exiting rules], 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.

[Kevin C]

Just to clarify my answer, my understanding of the IRS' concern is that participants might (theoretically) make decisions based on the contents of the SH notice, and they don't think the contents should be changed. While allocation formulas are not in our notices, they do reference the SPD, which contains the formula. I'm definitely not one who thinks that only the things on the "permitted" IRS list can be changed, but I do believe that this is what they don't think should be done. If it is not aimed at that, then what is it aimed at?

Over the years, I've heard several IRS representatives say that IRS concerns about sponsors providing a SH notice and then changing the rules are the reason the regulations have the mid-year amendment prohibition you cite. I've never heard anyone from the IRS say you can't amend anything that is mentioned in the SH notice. Several ASPPA speakers and at least one ASPPA comment letter have suggested that should be the standard. Some of them are still asking the IRS to give formal guidance that is is ok to change the Trustee or change the sponsor's address mid-year in a SH 401(k) plan.

The regulations section you cited clearly identifies the kind of plan provisions that can not be amended mid-year as those provisions that satisfy the rules of this section, meaning 1.401(k)-3. I've read through 1.401(k)-3, including (d) the SH Notice requirements, several times and can not find a single rule in it that any of the plan provisions dealing with the PS allocation method must satisfy.

If someone decides that their firm's standard for mid-year amendments will be to not amend anything at all, or to not amend anything referenced in the SH Notice, that is their decision and I respect that. But, speakers claiming that either of those is the IRS standard for mid-year amendments is another matter. If the IRS wanted either of those to be the rule, I firmly believe they would have written it into the regulations. They did not.

I'll get off the soapbox now.

[Bird]

Kevin, I really appreciate your thoughtful answer. Thanks for taking the time to explain.

Ed