Change SH Type for 1/1/17 after 11/30/16

[Danny CPA]

Hello all,

I am hoping you can settle a disagreement I am having with a few people inside my office. We have a client that is a Safe Harbor 3% for 2016, and has distributed the SH Notice for the 2017 plan year (they did so by November 30, 2016).

However, now the client would like to change to a Safe Harbor Match for 2017. Can the plan be amended for 2017 now, even though the 2017 safe harbor notice has been distributed?

Part 2 to that question, suppose a notice had NOT been distributed for 2017. Aside from an operational failure, does that change the answer above?

Thanks

[ETA Consulting LLC]

I don't think you can. There is a clear distinction of a plan that already has a 401(k) provision and a plan that doesn't. "IF" you don't currently have a 401(k), then you may establish one and issue your safe harbor notice concurrently with the establishment of the plan (at any time prior to October 1st of the year you are establishing the Safe Harbor). In your instance, that would be October 1, 2017.

However, the fact that you already have a 401(k) plan that you intend to make safe harbor will require your notice get distributed at least 30 days prior to the year. So, December 1, 2016 was your deadline for determining which Safe Harbor you were intending you use and to ensure you had the appropriate notice distributed.

I have no opinion on part 2 of your question.

Good Luck!

[RatherBeGolfing]

I am going to respectfully disagree with ETA to a certain extent.

As practitioners, we generally speak of the deadline for the SH notice as 30 days before the plan year, or December 1 , 2016 in this case. However, the law simply requires that the notice is distributed within a reasonable period before any year. A notice distributed 30-90 days prior to the beginning of the plan year is deemed to meet the reasonable time period requirement. That does not mean that a notice does not meet the reasonable time period requirement because it is less than 30 days. You would need to satisfy a facts and circumstances test to show that your notice period was reasonable.

I am not saying that it is reasonable in the OPs situation, but if the circumstances were right, it is possible that it can be.

[ETA Consulting LLC]

I am going to respectfully disagree with ETA to a certain extent.

I knew this day would eventually come

"If everyone is thinking alike, then someone isn't thinking." -- W. Edwards Deming

[Bill Presson]

I agree that it CAN be done but isn't usually recommended. I liken the SH distribution timing to the deferral deposit timing. If we meet the 30 or 7 day limits, then we must prove nothing further.

If we don't, then we have to show facts and circumstances as to why the timing was different.

[RatherBeGolfing]

I agree that it CAN be done but isn't usually recommended. I liken the SH distribution timing to the deferral deposit timing. If we meet the 30 or 7 day limits, then we must prove nothing further.

If we don't, then we have to show facts and circumstances as to why the timing was different.

Yep. Not arguing that it should be done, just that it can be done. 99.9% of the time I would advise a client to stick to the 30 days and make change next year.

[austin3515]

https://www.irs.gov/pub/irs-drop/n-16-16.pdf

Well no one really addressed the question. I skimmed through this and there several prohibitions and requirements for MID YEAR changes. I see nothing at all regarding any restrictions whatsoever regarding changes before beginning of the Plan Year.

I would be curious to see if others have a different take on it?

And 12/1 is definitely NOT a deadline for distributing the notice - not in the same way that the 5500 is due by 7/31 or 10/15. Not saying it is the best practice but $#!t happens sometimes and I'm not afraid to go there! [edited this last paragraph]

[Jim Chad]

FWIW I think it is legal to make this change now.

[Tom Poje]

It is a facts and circumstances

30 days and the IRS blesses things and says the participants have a chance to make an informed decision.

at this point it is more than 15 days

I'd say that is probably enough time, but other factors (e.g. number of participants involved) might make a difference.

If someone was taking a months vacation beginning tomorrow, well, of course, not much time there.

[GMK]

Sounds like the fact that they issued the the 3% safe harbor notice in November is not a factor in whether or not a different safe harbor notice can be issued now. Am I reading that correctly?

[ETA Consulting LLC]

Sounds like the fact that they issued the the 3% safe harbor notice in November is not a factor in whether or not a different safe harbor notice can be issued now. Am I reading that correctly?

You're reading it correctly. It's a factor, but just not as much of a factor. As these guys stated, it's a facts & circumstances case to show that the safe harbor (actually being used) was provided withing a reasonable amount of time prior to the beginning of the year. So, my contention was (without vetting it) that they've already missed the '30 day' notification period. As these guys pointed out, there are instances where the change of the safe harbor method may be used (still prior to the beginning of the year, but inside the 30 day window); but you'd need to document that the notification was within a reasonable period (under facts & circumstances) since you clearly missed the 30 day advance notice. I actually agree with them :-)

Good Luck!

[John Feldt ERPA CPC QPA]

Suppose the first paychecks in 2017 are to be paid on January 15, 2017. Will the IRS say that employer, by giving the safe harbor notice today, violated the "reasonable period" requirement for providing the notice?

Did the participants not have enough time to make an informed salary deferral election for that January 15, 2017 paycheck?

Those would be at least a couple of questions that the employer should be willing to consider.

[rcline46]

Make sure the employees have at least 30 days to make deferral changes. IE allowing changes only on January 1st is not enuf time.