How bad does this mid-year SHM change feel?

[AlbanyConsultant]

I have a client who is just now realizing that the safe harbor match true-up provision they've had in their plan for almost a decade is "costing [them] money" by making them do more match than just what they calculate weekly (I suspect a new bookkeeper).  They want to do a mid-year amendment to remove the annual true-up of the safe harbor match effective ASAP.

 

I don't see where this neatly fits into one of the prohibited amendment boxes, so I'm thinking this might not actually be too bad.  It feels wrong, but maybe that's just me.  If this is OK, would you keep the true-up through a date 30-days in the future (maybe April 30)?

 

Thoughts?  Thanks.

[Lou S.]

I think it's a cutback of an already promised benefit. You want to eliminate for next year fine, this year I think you already have a 411 prohibited cutback at participants have already "accrued" a right to the true up in the plan document.

[hr for me]

agree you could do it for next plan year, but it is possible that someone already accrued some rights for this year. And I suspect once they explain it to the employees, they will get smarter and spread their deferrals over the whole year to get the whole match, so not sure the employer will save that much except possibly for terminated employees.

[ETA Consulting LLC]

I agree that it cannot be done, but for a separate 'technical' reason.  I don't think 411(d)(6) is applicable because the amendment would be prospective. Anytime (in general) that you want to eliminate the true up during the year, you'd just provide the true up through the effective date of the amendment. But, the idea of actually changing the safe harbor match formula during the year would seem to be the point of contention.  I wouldn't dream of trying to do something like this during the year; but just don't think it's (technically) a cutback issue.

Good Luck!
 

[Tom Poje]

in addition there might be a possible issue of an HCE having received a higher rate of match

(e.g. in January he didn't need a true up, but an NHCE would)

[TPAJake]

I agree with ETA on the technical basis, but in very non-technical terms it doesn't pass "the smell test" for me either.  

[Kevin C]

A mid-year amendment to the match formula is prohibited under 1.401(k)-3(e)(1).  The modifications to that rule in Notice 2016-16 provide that the only mid-year formula changes allowed are ones made with at least 3 months remaining in the year and that increase the safe harbor contribution.  See Section D of the notice.  The amendment under discussion would result in lower SH amounts for at least some individuals. So, if they do the amendment mid-year,  they would fall under the rules for reducing or suspending the SH contribution under 1.401(k)-3(g) and lose the SH for the year.