Safe Harbor Nonelective and 415

[Gilmore]

3% Nonelective, calendar year, safe harbor plan. ER has historically made the 3% nonelective in December of the following year. ER's tax year is calendar year.

For 2015 the ER would like to make a profit sharing contribution for the first time, in addition to the safe harbor.

Is the nonelective for 2014 which will be deposited in Dec, 2015, treated similarly to a QNEC in that the 2014 nonelective must be counted in the 2015 415 limit?

If that is true, are participants who receive the 2014 nonelective but also terminated in 2014 treated as benefitting under the plan for the 2015 plan year? Meaning would they need to share in any top heavy or gateway contributions for the 2015 plan year?

Thank you.

[ETA Consulting LLC]

I gather that the client is intending to fund the Safe Harbor for 2014 by the end of 2015, but it past the deadline for having the contributions treated as 415 additions for 2014 (barring an exception that would allow them to continue to count).

"IF" you've provided a Safe Harbor Notice and promised a 3% non-elective, then I could see an argument that any funding beyond this 415 deadline is due to an oversight and should still count as annual additions for the 2014 year. Otherwise, you encounter a situation where a participant in 2014 simply failed to receive their 2014 SHNEC as promised and you, therefore, fail to meet the safe harbor requirements. It would be too easy to merely miss the 415 additions deadline to claim that a zero 415 limit in 2015 (for someone terminating in 2014) is what precluded the participant from receiving the contribution as promised.

I guess it boils down to what you would consider an allowable exception to have the deposits considered at annual additions to the plan for the 2014 plan year.

Good Luck!

As for the additional contributions (beyond the safe harbor), it would be a little harder to argue a mere oversight.

[Mike Preston]

The last comment is way too delicate. A client that "historically" makes the SH contribution more than 30 days after the due date of the tax return is an IED waiting to detonate. Get them to change or prepare for ongoing EPCRS filings.

[Gilmore]

The ER is not trying to avoid providing a safe harbor contribution for any participant.

The safe harbor rules permit the nonelective to be made within 12 months of the plan year end, which is what they do.

To date this has not been an issue because no additional contributions have been made beyond deferrals and the safe harbor contribution.

I see in the EOB that a QNEC made to correct an ADP test that is made beyond the 415 30 day grace period may need to be corrected if a participant does not have compensation in the year the QNEC is deposited. However how can that possibly work for safe harbor contributions? I would think an exception would have to be made if the regulations permit the deposit to be made within 12 months.

[Mike Preston]

Welcome to the confusing world of pensions.

[K2retire]

The ER is not trying to avoid providing a safe harbor contribution for any participant.

The safe harbor rules permit the nonelective to be made within 12 months of the plan year end, which is what they do.

Why are they waiting so long? The rule is that the contributions are supposed to be made sooner. The 12 month rule is similar to the 15th day of the following month for depositing deferral contributions -- it is intended as a maximum limit for extraordinary circumstances, not a routine practice.

[Mike Preston]

And I can't find anything that specifically states the rule of 1.415©-1(b)(6)(i)© doesn't apply.

Strangely, I *can* find a rule saying that 1.415©-1(b)(6)(i)© *does* apply to QNEC's made to satisfy an ADP test using the current year testing method.

But absolute silence when it is the SHNEC.

To remove all doubt, why not take the pro-active approach and conform to 1.415©-1(b)(6)(i)© ?

[Gilmore]

I can advise every year, but the client makes the deposit not me. Hopefully this situation will make for a stronger arguement going forward.

I've never seen anything that says the 12 month deadline is for extraordinary circumstances, however, and I also cannot find anything specific to the safe harbor nonelective contributions with respect to 415, hence my original question.

[Mike Preston]

Yes, but the client is also advised by you as to whether the timing of the contributions results in a 415 violation or not. That is certainly an obligation under any reasonable standard of care doctrine I can imagine. So, if the fit hits the shan, and the IRS later claims an uncorrected 415 violation, your client will blame your firm for not telling them about the exposure.

[Gilmore]

Understood. And I guess that brings me back to my original question. Is there a 415 violation? A participant has to get the safe harbor and the regs permit the contribution to be deposited within 12 months of the plan year end. How do those two things square if there is no exception for the safe harbor nonelective?

[Mike Preston]

Who says those two things need to square. Something has to give and 415 never gives. As I've said from the beginning, it sounds like a 415 violation requiring an EPCRS filing to "square".

[austin3515]

I happen to agree that the ambiguity redounds to the sponsor's benefit. The SH rules explicitly state they must be funded by 12/31. So if you comply with that requirement, I happen to believe that you should be ok.

The EOB says "The safe harbor contributions must be made no later than 12 months after the close of the Plan Year.... However, if the employer wants to deduct the contribution for a particular taxable year, the contribution must be made by the due date for filing the employer's federal income tax return."

Also, the 415 deadline is tied directly to the deduction rules. There is in my opinion a huge unexplained void regarding how you treat 415 limits if the contribution is deducted in the year funded. I really think Sal would have said something about the 415 limit if it was a concern.

[Gilmore]

I'm trying to think through what a correction might look like. The plan sponsor allocated the safe harbor to every participant that was entitled in 2014, and deposited the contribution within 12 months.

If a participant terminated in 2014 and did not have compensation in 2015 does that mean the correction is to take away their 2014 safe harbor contribution? Is the plan no longer a safe harbor plan for 2014 even though the contribution was made within the permitted time?

[Tom Poje]

from the 2010 ASPPA Conference, page 4 (sorry the Q and As were not numbered that year)
Q:
An employer had a safe harbor election for the plan year 2008. The plan and company both operate on a calendar year. The plan is a trustee directed, balance forward plan. The required 3% contribution was, say,
$15,000. Employer does not go on extension; employer puts the $15,000 into the plan in September of 2009. The contribution is not deductible for 2008 (they'll deduct it in 2009). However, under Section 415, it is not an
annual addition for 2008, since it was not contributed within 30 days of the tax deadline. However, it is SUPPOSED to go in for 2008 and be allocated for 2008. Is there a failure to provide the safe harbor contribution for 2008? If so, how to correct? (Note, this could also be an issue anytime a QNEC needed to pass ADP or ACP testing is deposited more than 30 days after the tax return due date but within the 12 month correction period under IRC 401(k).) What if the deposit is not made until after 12/31/09 - that is, more than year after the plan year end to which it applies?
IRS Response
Contributions made after the Section 415 timing date of 30 days after the tax return due date are considered to be annual additions for the following year. However, if consider the contribution a self-correction under EPCRS, it is permissible to relate this back to the earlier year. If the contribution is made after 12/31, you are clearly under EPCRS. [One of the exceptions to the 415 timing rule is an erroneous failure to allocate. See Treas. Reg. 1.415©-1(b)(6)(ii)(A). EPCRS clearly treats post-415-period deposits that relate back to a prior plan year as an annual addition for the year to which it is meant to be paid, but EPCRS applies only after the 12/31/09 deadline. Therefore, there is a lack of guidance for the period between 30 days after the tax return due date and the end of the 12-month regulatory correction period.]

.............

Basically I think the IRS representatives were saying if it is a required contribution it is probably reasonable to apply the 415 to the year required, no matter when deposited. Otherwise, you would simply wait until after 12/31 and make the deposit and then you would be ok. this logic of course in many ways makes little sense. If the contribution is discretionary I think you have problems because of the timing.

[Bird]

Catch-22. I agree that the rules are very clear about SHNEC contributions being able to be made 12 months after the end of the plan year, and don't see it being reserved for extraordinary circumstances.

I found Mike's reference to *not* ignoring Treas. Reg.1.415©-1(b)(6)(i)(B) here, the relevant part being:

This 12-month rule does not change the rule under IRC 415, that employer contributions shall not be deemed credited to a participant's account for a particular limitation year unless the contributions are actually made no later than 30 days after the end of the IRC 404(a)(6) period applicable to the taxable year with or within which the particular limitation year ends. See Treas. Reg.1.415©-1(b)(6)(i)(B).

I ignore it (shrug). I don't know whether they just didn't contemplate participants not having compensation in the year following the allocation year, or what, but that's one where I'm going to make them do something about it when they catch it. Plus now we have Tom's posted Q&A as support. (Not that it's a common or even a known problem for our plans, although I can think of one or two that do it "late.")

[Gilmore]

Thank you for all of the input.

[Gilmore]

BTW, my son is a Combat Engineer in the Army Reserves whose job duty is route clearance, so I would say any pension problem pales in comparison to an IED that is ready to detonate.

[ETA Consulting LLC]

It was still a good metaphor. I use the terminology "prevent it from blowing up" all the time. It goes to math; it typically takes 5 hours to correct a problem that takes only 15 minutes to prevent. So, it's always worth it to devote the additional time and energy necessary to keep things from blowing up.

Good Luck!

[BG5150]

.............

Basically I think the IRS representatives were saying if it is a required contribution it is probably reasonable to apply the 415 to the year required, no matter when deposited. Otherwise, you would simply wait until after 12/31 and make the deposit and then you would be ok. this logic of course in many ways makes little sense. If the contribution is discretionary I think you have problems because of the timing.

I think would/should only work once. Part of the correction process is to take steps to prevent the error from re-occurring. Maybe once or twice, but relying on that method of dodging 415 year after year is contrary to the SCP principles.