safe harbor or not?

[Santo Gold]

401(k) Plan that has a conditional 3% safe harbor language in the plan document. The employer had the 2015 plan year notice prepared in November, 2014, stating that the employer WOULD make the 3% safe harbor for the 2015 plan year.

But, the employer never distributed the notice. Now, in April, 2015, the employer would like to not make the 3% safe harbor fr 2015.

Since the notice was never distributed, and the plan document allows for a conditional safe harbor, is the employer still on the hook for the 3% safe harbor for 2015?

Thanks

[Lou S.]

Isn't failure to give the notice an operational failure?

[Kevin C]

What does the plan say? If it says the 3% SH contribution will be made, it's required for 2015. If it says the 3% SH contribution will only be made if the proper notices are provided, the 3% SH isn't required unless they send the notices. Our VS document has choices in the adoption agreement for both options.

[Santo Gold]

Document does state that the safe harbor is optional and that the notice must be given. It goes into detail about the safe harbor being optional and the employer needed to inform the participants 30-90 days before the plan year starts and then again 30 days before the plan year is over as to whether there will be a safe harbor contribution.

But, they never distributed a notice 30-90 days prior to 2015. I think the operational failure that Lou S mentioned may be valid. But, I am thinking that the 3% is not required for 2015.

[Tom Poje]

you are leaving out the most important point

1.401(k)-3(f)(1) requires plan must be amended 30 days priors to the end of the plan year, effective as of the first day of the plan year making it a safe harbor.

it does not sound like this was done, so plan is not safe harbor. even if they gave the notice - otherwise you have not followed the terms of the document. but the notice itself is not an amendment.

there is nothing to stop them from providing a 3% QNEC (aside from a document that says no QNEC) and that could be used in ADP testing of course.

I'm not sure there is an operational failure

1.401(k)-3(f)(3) says the follow up notice is required 'that states the safe harbor will be made for the plan year.'

I don't see where it is required if it will NOT be made.

generally you would do so because either

1. you will make the SHNEC in the given year and on a permanent basis going forward

2. make the SHNEC for the current and maybe next year

3. will not make the SHNEC but maybe next year

4. I suppose will not make the SHNEC and no intention the following year

[Santo Gold]

Thanks Tom.

If the plan document states that the safe harbor is conditional, is it your opnion then that if the proper steps are not followed each year (i.e., no amendment is signed and/or no notice is given), that the default is that the plan is not a safe harbor for the upcoming plan year? That would appear to be so in this document; there is language stating "for any plan year in which the employer has elected a safe harbor". I would interpret that to mean that the employer must proactively make the plan a safe harbor each year. To do nothing means no safe harbor.

But is it required that with a conditional safe harbor, an amendment be executed each year, stating clearly whether there will/will not/possibly be a safe harbor for the upcoming plan year?

About the notice points that you mentioned - since 2015 plan year is the year in question, the follow up notice is not really the problem, since that is not needed until later in 2015. And if there was no notice provided in 2014 about the 2015 safe harbor, is a followup notice even needed since nothing was announced prior to the plan year?

Thanks

[Bird]

401(k) Plan that has a conditional 3% safe harbor language in the plan document. The employer had the 2015 plan year notice prepared in November, 2014, stating that the employer WOULD make the 3% safe harbor for the 2015 plan year.

If it's a conditional SH then a final decision for 2015 would be made in November of 2015, with a notice saying whether the 2015 contribution is or isn't being made. So, notice or not, there's no SH obligation for 2015.

The Nov 2014 notice(s) should say, in essence, "we might make a SH contribution for 2015" and "we will (or will not) make a SH contribution for 2014."

I don't know if everyone else is assuming there are typos and you are talking about 2014 or what but I am confused.

[Kevin C]

It depends on what the document says. There are two different ways the conditional 3% SH can be done. If the document requires an amendment to implement the 3% SH under a conditional notice, then no amendment means no SH contribution. If the plan is worded like one of the options in our VS document where the 3% SH is made only as authorized under a supplemental notice, delivery, or not, of the notice determines whether the plan is 3% SH. If your document language is like the latter, it should have something like this:

... If the Employer does not provide the supplemental notice in accordance with this paragraph, the Employer is not obligated to make the Safe Harbor Employer Contribution and the Plan does not qualify as a Safe Harbor 401(k) Plan. The Plan will qualify as a Safe Harbor 401(k) Plan for subsequent Plan Years if the appropriate notices are provided for such years. No amendment is required to make the Safe Harbor Employer Contribution in subsequent Plan Years.

If it doesn't have similar language saying the notice controls whether or not the 3% SH is provided, then I think they would need to amend to be 3% SH.

[Tom Poje]

well put, such document language almost sounds like "fail-safe language", for lack of a better term.

(In some ways I'm surprised such language is permitted. it almost sounds like the language that was in documents when safe harbors first came out, and they said something like 'we will be safe harbor if we issue a notice' and the IRS said no you can't do that. I remember even talking about that with one of the folks from Corbel about that.)

[Kevin C]

I was surprised to see it, too. But, it is in both the EGTRRA and PPA documents. It's not hidden either. There is a note in the adoption agreement under that option that describes in great detail how the provision works.