Another Amendment to Safe Harbor Plan Question

[austin3515]

My FAVORITE topic...

Plan uses 3% nonelective. They have a match that does not meet the ACP Safe Harbor (at least I don't think it does) because they cap the match at $5,000 per year. I don't think it meets the ACP because it is at least possible that an HCE could have all of his/her deferrals match, while an NHCE (perhaps one whose compensation increases substantially from the prior year) does not have 100% of their contributions matched.

But regardless, they want o increase the cap from $5,000 to $6,000. That means that some HCE's and some NHCE's will get more match, but probably will disproportionately benefit HCE's, because the full $6,000 match only inures to those making more than $120,000. Of course, if one looks at it from a different perspective, it is truly the HCE's who have been discriminated against all along.

Anyway, permissible or not too permissible?

[Belgarath]

I'd say no can do. Or, at least, I wouldn't. By that I mean that although I don't have a problem with it based upon a (in my view) correct and less broad view than the IRS takes, I nevertheless think that it is aggressive until such time as the IRS smartens up on all this foolishness.

[Kevin C]

I don't see any rules in 1.401(k)-3 that a non SH match must satisfy. If the cap on the match causes the match to not be a SH match, then I don't see the cap as a plan provision satisfying a rule in 1.401(m)-3. I think your situation puts your question in the same category as asking if the profit sharing formula (or any other non-SH provision) in a SH plan can be changed mid-year.

I agree there is a lot of foolishness regarding this topic. But, I don't agree that the IRS is behind it.

http://benefitslink.com/boards/index.php/topic/55219-the-irs-continues-to-behave-badly/?p=240680

[austin3515]

I don't see any rules in 1.401(k)-3 that a non SH match must satisfy.

But, I don't agree that the IRS is behind it.

These two comments do not seem to reconcile. It is the IRS's stringent interpretation of the rules regarding amendments to safe harbor plans that is behind it. I think most people generally agree that the regs themselves pretty clearly would not prohibit this sort of change. Your reading/cite of the reg suggests you fall into this camp. It is only the IRS's comments that have "freaked" everyone out.

[Kevin C]

Which IRS comments are you referring to? I've asked for several years for someone to provide documentation of a single time the IRS actually said this. No one has. I've heard and seen multiple claims that the IRS said this at the 2011 ASPPA annual conference. I was there and reviewed the recording afterward. No one with the IRS made such a statement.

Last Fall, I had a chance to discuss this issue with an ERISA attorney and frequent speaker at conferences. I asked him what comments from the IRS were the basis for claims that absolutely no mid-year amendments to SH plans except for those specifically blessed in guidance. He said those claims were based on the same comments I've been hearing that the IRS was concerned about mid-year amendments to SH plans, which is why they put the rule prohibiting certain mid-year amendments in the regulations. He has not heard the IRS say that all mid-year amendments are prohibited.

I don't blame the IRS because the only ones I hear making these claims at conferences are non-IRS speakers. As recently as the 2014 ASPPA annual conference, two of those speakers said that we still don't know if it is ok to change Trustees mid-year.

I've also pointed out that if the IRS really has this draconian position, it should show up in many areas of published guidance. An improper mid-year amendment to a SH plan disqualifies the plan. Why isn't it mentioned in the review guidelines for determination letter requests? This is the second restatement cycle for pre-approved plans since the final 401(k)/401(k) regulations and the third since SH Plans started. Why isn't it mentioned in any of the guidance on restatements? Relius claims this supposed IRS position goes back to 1999, so why isn't it included in the final 401(k)/401(m) regulations? And, why aren't we hearing about all of the plans the IRS has threatened to disqualify over this?

<Rant mode off>

[austin3515]

OK then answer me this. Why come out with a revenue procedure or notice or whatever it was indicating that it is ok to add Roth 401k and hardship distributions? Based on your position that would have been stating the obvious.

[austin3515]

http://www.irs.gov/pub/irs-drop/a-07-59.pdf

The Internal Revenue Service has learned that some employers have

concerns about adding provisions during a plan year to their § 401(k) safe harbor

plans (described in § 401(k)(12) of the Internal Revenue Code) in order to take

advantage of recently effective changes to the rules for § 401(k) plans, such as a

qualified Roth contribution program (as defined in § 402A) or hardship

withdrawals described in part III of Notice 2007-7, 2007-5 I.R.B. 395, when the

pre-year safe harbor notice required by § 401(k)(12)(D) does not include

information about the added provisions.

This announcement provides that a plan will not fail to satisfy the

requirements to be a § 401(k) safe harbor plan merely because of mid-year

changes to implement a qualified Roth contribution program (as defined in

§ 402A) or the hardship withdrawals described in part III of Notice 2007-7.

[austin3515]

Someone else at one point made a fabulous comment which is that surely during all of the determination letter proceedings over the last 8 years a trend would have been detected if the IRS was taking a hard-line stance regarding this provision.

But I do believe that the above-referenced notice started the controversy because it was so hyper-specific. They could have opened the net a lot wider but did not.

Make no mistake about it, I do not think the regs support this insanity. I think I said that but wanted to clarify that we agree on much more than we disagree.

[Kevin C]

Austin, you and I do agree much more on this issue than we disagree. I think our main point of disagreement is whether this was caused by the IRS or by certain ASPPA speakers.

The Roth and Hardship guidance WAS stating the obvious. Anyone who read the regulations should not have been surprised. My guess is that they got tired of industry groups asking them silly questions and decided to publish something so they would stop asking. Obviously, that did not work.

The only thing from the IRS that says a particular amendment that looks like it should be allowed by the Regs can not be made mid-year after a certain deadline is a blurb buried in the in-plan Roth conversion guidance. My guess is someone at the IRS got carried away and decided that since SH accounts could be converted to Roth that the amendment would be changing some provision that satisfies a rule in 1.401(k)-3 or 1.401(m)-3.

I think the point you mention about determination letters was from our discussion that I linked to in post #3.

[Belgarath]

I'll merely observe this - since I don't profess to know the answer. The IRS is well aware of the confusion and practitioner questions on this issue, which has now been going on for years. If they truly take the approach that mid-year amendments that do not contradict the specific terms in the Safe Harbor plan requirements under the regulation, then they could have just said so at any time and cleared up this mess once and for all.

Since they have thus far failed to do so, not even from the podium where it is unofficial - people are understandably concerned, and thus are often very (perhaps needlessly) conservative. It remains to be seen as to whether this conservatism is necessary or not. I confess that my modus operandi on such issues is generally that discretion is the better part of valor.

As to the question of whether the IRS, the qualified plan practitioner community, or both, are responsible for the confusion, I honestly have no informed opinion, nor, to me, does it truly matter at this point. Until the IRS issues guidance, I'll stick with conservatism. To a degree...and that's the problem with all of this - we all have to draw the line somewhere, and the line is often blurred.

It is astonishing that this one issue has caused so much trouble.

[Kevin C]

If they truly take the approach that mid-year amendments that do not contradict the specific terms in the Safe Harbor plan requirements under the regulation, then they could have just said so at any time and cleared up this mess once and for all.

Actually, they have said it. I've heard several IRS speakers over several years say that they have published guidance on the issue and they had no plans to issue further guidance. I interpreted their comments as "Read the Fabulous Regulations".

The IRS speaker at the 2011 annual conference said this:

This is a conversation that we have on an annual basis. There is some particular guidance out there, there’s Announcement 2007-59 and some provisions in the 401(k)-3 Regulations that specifically talk about permissible mid-year changes. We did seek comments on additional mid-year changes, but at this point we are sticking with the guidance out there.

[Belgarath]

Thanks Kevin, but I don't think that in any way addresses how the IRS interprets the regulations. It just says "the regulations are there, 2007-59 is there, and we're sticking with the guidance." It does not address the question of, "great, so do you, the IRS, interpret your regulations to prohibit mid-year amendments to, say, a profit sharing allocation method, or __________________fill in the blank." And there's been more than enough questioning of this since 2011 so that they could have easily cleared it up. And they haven't.

Mind you, I'm not saying your interpretation of the IRS official position is wrong. It may well be right. It's just that I don't feel confident it is right, either. So I'm neither disagreeing or agreeing with you, and continuing to play it safe until I feel confident that the IRS position is, in fact, as you believe it is.

Anyway, thank you for your opinion.

[Bird]

I still (mostly) agree with Kevin on this. I think the IRS thinks/knows that they can't list all of the amendments that would be permitted (and it's a little silly to think that they could/should do so, to be honest), so they named a couple of obvious ones and let it be at that.

I am pretty sure they did express some "concerns" about mid-year amendments, and those concerns related to the notice requirements (changing something that is covered in the notice being the issue). I think they have legitimate concerns as the regs say that amendments to the SH provisions are not allowed (1.401(k)-3(e)), below (this was cited in the link from Kevin above), and I think the notice requirements are part of the SH provisions. So I will definitely not change something that is in the notice (unless it is specifically permitted, like Roth contributions, or it is some similar expansion of benefits or provisions). But...I'll avoid it if possible.

(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 or in guidance of general applicability published in the Internal Revenue Bulletin (see § 601.601(d)(2)(ii)(b) of this chapter), 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. Moreover, if, as described under paragraph (h)(4) of this section, safe harbor matching or nonelective contributions will be made to another plan for a plan year, provisions under that other plan specifying that the safe harbor contributions will be made and providing that the contributions will be QNECs or QMACs must also be adopted before the first day of that plan year.

[Kevin C]

Belgarath, the regs are not an easy read, but they are very clear about which mid-year amendments are prohibited. With every other issue in our field the industry approach is that something is allowed unless it is prohibited. For some reason, some people want the opposite here. Yes, the IRS has not publicly stated that amending for example, the profit sharing contribution mid-year is allowed, but they also have not said it is prohibited. I'll take Bird's statement even farther. I think the IRS would be crazy to provide a list of approved amendments. For every amendment you can think of that should be added to the list, I bet we can come up with a particular set of circumstances where that amendment should logically be prohibited. Trying to compile a list that wouldn't come back to bite them in the ___ would be impossible.

Bird, I think you are mis-reading the regulations. If you look at the cite you quoted above, the mid-year amendment prohibition applies to "provisions that satisfy the rules of this section", meaning 1.401(k)-3. The same wording is in 1.401(m)-3(f)(1) referring to the rules in 1.401(m)-3. The safe harbor regulations section dealing with the SH notice, 1.401(k)-3(d), tells you which plan provisions must be described in the notice, but it doesn't have any rules that those plan provisions must satisfy. There is a thread here somewhere where this was discussed at length.

I think the first time I heard anyone suggest that anything mentioned in the SH notice be the standard for which mid-year amendments are prohibited was Craig Hoffman at the 2010 annual conference when he tried unsuccessfully to convince the IRS representative that it should be the standard. I see it as an unworkable standard. Consider two identical plans. Plan A provides a bare bones SH notice that just barely satisfies the notice requirements. Plan B provides a detailed SH notice that goes beyond the minimum requirements. Under this standard, Plan A can do amendments that Plan B can't. To me, that makes no sense and would encourage a race to the bottom for SH notice content. I don't want to think about how this standard would apply if your SH notice refers to the SPD. And, what happens if they "forget" to distribute a SH notice for the year? Do they get rewarded by being able to do amendments that plans who follow the rules can't?

In case anyone is wondering, I've spent a lot of time on this issue over the years.

[austin3515]

Here is Corbel's article on this topic. They shed some light on where they are coming from.

http://www.relius.net/news/TechnicalUpdates.aspx

Edit: Apparently the link does not go straight to the article. It is under 2014. March 11, 2014 - Safe Harbor 401(k) Plans: IRS Position on Mid-year Amendments

[Belgarath]

Kevin - thanks for the response. I want to make it clear again that I don't disagree with your interpretation of the regulations. I'm just not necessarily convinced that the IRS position that you assert is a certainty. There are a lot of other smart folks out there, some of them with pipelines to the IRS, who believe otherwise.

So, while as always your arguments are logical and well-reasoned, (and you are very likely right) I'll stick with cowardice for the time being.

[Bird]

Bird, I think you are mis-reading the regulations. If you look at the cite you quoted above, the mid-year amendment prohibition applies to "provisions that satisfy the rules of this section", meaning 1.401(k)-3. The same wording is in 1.401(m)-3(f)(1) referring to the rules in 1.401(m)-3. The safe harbor regulations section dealing with the SH notice, 1.401(k)-3(d), tells you which plan provisions must be described in the notice, but it doesn't have any rules that those plan provisions must satisfy. There is a thread here somewhere where this was discussed at length.

Thanks Kevin. There'll probably be a new thread on this in a few months, and I'll think it sounds familiar and re-read the regs, and probably mis-read them again, so I apologize in advance.

[austin3515]

I would guess that Corbel has some of those pipelines to the IRS and they say in their article:

"The IRS, on the other hand, interprets this provision as permitting mid-year amendments only when the IRS formally issues an exception."

Even though I know Corbel thinks this is an incorrect interpretation of the regs, I have enough faith in them to believe that someone very high up in the food chain told them just that.

[rcline46]

I absolutely regulation by fear. Ye olde Napoleonic code. The big bully because each little guy (our clients) cannot afford to challenge them in the courts. Isn't there an ombudsman in the IRS to take on our questions and fight for us?

Its getting to be election time. The IRS/Treasury listens better during this season.

[Kevin C]

I don’t think Relius has access to any information that the rest of us don’t have. The premise of their statements and those of others with the same viewpoint has been that the IRS has been consistently saying this publicly for years. One Relius article says the IRS position goes back to 1999. As I’ve mentioned several times, I can’t find anyone who can point to a single time the IRS actually said this publicly. If this comes from informal discussions with the IRS, why not say so? What I think we are seeing is them trying to “read between the lines” to interpret what we have all been hearing the IRS say. As recently as December 2013, this Relius article said "The IRS, on the other hand, seemingly has interpreted this as preventing any mid-year changes to the plan unless the IRS granted an exception." That doesn’t sound like anyone from the IRS told them about the IRS’ position.

The quote is from the end of the second paragraph. The reference to 1999 starts the article.

http://www.relius.net/News/TechnicalUpdates.aspx?ID=1004

So, on one hand, we have a sixteen-year-old supposed IRS position that even according to Relius is not being enforced. On the other hand we have clearly written published guidance, informal guidance at conferences and some important pieces of written guidance where this supposed IRS position should have been addressed, but was not. Like so many things in this business, you have to decide which interpretation you think is correct. If you want to follow the interpretation Relius and some others, that’s your choice. But, if you want to say that following the published guidance is wrong, I’ll keep banging my head on the wall.

[austin3515]

rcline, I have an idea, we should print the full versions of the last 3 threads on this topic and send it to the top IRS person via FedEx. We should all do it so they get 25 copies of all the same message board discussions!