Switching Safe Harbor Types Under New Rules

[PensionPro]

A safe harbor 401(k) plan with basic match formula wants to switch to 3% nonelective for the current year 2016. Is this permissible? It does not appear to be prohibited. Thank you for your comments!!

[GMK]

Is this the same question? If so, here are some comments.

http://benefitslink.com/boards/index.php/topic/58702-hybrid-safe-harbor-design/

[PensionPro]

It is not the same question. My question has to do with the mid-year amendment rules. Plan is doing a basic safe harbor match and wants to do a mid-year amendment effective 1/1/16 to provide 3% nonelective IN LIEU OF the safe harbor match.

[Lou S.]

Not allowable. 3% non-elective is less than the at least 4% minimum match that participants were guaranteed under the document and in the notices.

[PensionPro]

The document would be amended and updated notices provided. The amendment itself does not seem to be prohibited. The new rules prohibit changing from QACA to regular SH and vice versa.

If the match is to be calculated at YE is there still a cutback issue, assuming that's the argument here? Also, are you saying that a plan could go from a 3% nonelective to 4% match mid-year?

Thanks!!

[austin3515]

From the recent IRS Notice:

The following mid-year changes are not subject to the provisions in the first paragraph of this section III.B, but instead would violate the requirements of §§ 1.401(k)-3 and 1.401(m)-3 unless the applicable regulatory conditions corresponding to each specified change are satisfied:
(i) Adoption of a short plan year or any change to the plan year (permitted only as described in §§ 1.401(k)-3(e)(2), (3), and (4) and 1.401(m)-3(f)(2), (3), and (4));
(ii) Adoption of safe harbor plan status on or after the beginning of the plan year (permitted only as described in §§ 1.401(k)-3(f) and 1.401(m)-3(g)); and
(iii)Reduction or suspension of safe harbor contributions or changes from safe harbor plan status to non-safe harbor plan status (permitted only as described in §§ 1.401(k)-3(g) and 1.401(m)-3(h)).

And the regulations say this about reducing or suspending the match (for example)
(g) Permissible reduction or suspension of safe harbor contributions

(1) General rule

(i) Matching contributions. A plan that provides for safe harbor matching contributions intended to satisfy the requirements of paragraph © of this section for a plan year will not fail to satisfy the requirements of section 401(k)(3) merely because the plan is amended during the plan year to reduce or suspend safe harbor matching contributions on future elective contributions (and, if applicable, employee contributions) provided that—

[PensionPro]

Thanks for looking that up, Austin! That citation relates to the exiting rules where a SH match is reduced or suspended mid-year and the plan becomes subject to ADP/ACP testing. Maybe the regs don't contemplate or permit a situation where a plan switches mid-year from one type of SH (e.g. match) to another type of SH (e.g. nonelective)?

[austin3515]

I'm not with you on that. The regs talk about how to suspend or reduce the match (and now the nonelective too). You are wanting to suspend one and add another. But the latter is beside the point because your suspending one. If you are suspending the match, you must follow the rules regarding suspending the match.

I don;t think I'm oversimplifying it.

[PensionPro]

I see your point. I am exploring the possibilities so do not have a firm opinion yet. My concern is that one of the requirements under item E of your citation is that the plan needs to be "amended to provide that the ADP test will be satisfied for the entire plan year in which the reduction or suspension occurs using the current year testing method ..." So it seems possible that the plan will not be exempt from the ADP/ACP requirements even if it is SH for the entire year using different methods.

The other more practical concern is that lets say we suspend SH match as of 4/30/2016 can the 3% SH nonelective be effective 5/1/2016 of does it need to be effective 1/1/2016?

Thanks for helping me think through this!

[austin3515]

I don't think so because of the 12 month plan year requirement. You can't add safe harbors mid-year.

What you want to do is change the plan year-end. That's the ticket for you. The only requirement there is that be a safe harbor (does not specify which kind) for the next "12 months."

[PensionPro]

Yes I don't think there is a simple path here. Thank you!