Safe Harbor Plans and 410(b)

[ERISAAPPLE]

A consultant referred a plan to me.  He said they have a safe harbor plan with the 3% QNEC. 

He said they realized this year that the plan's safe harbor QNEC failed 410(b) last year.  All they have are the 3% QNEC and 401(k) deferrals.  They want to correct with an corrective amendment under 1.401(a)(4)-11(g).  The problem, the consultant says, is some of the employees they are going to add did not receive the safe harbor notice.  He wants to know if they can adopt an 11(g) amendment and separately correct the failure to provide the safe harbor notice under EPCRS.

I am struggling, however, with the idea that they somehow failed 410(b) "after the fact"  with a safe harbor contribution.  It is not as if they have a last day of the PY requirement with terminated employees, which can cause an "after-the-fact" 410(b) failure.  

Is it possible for a safe harbor plan to fail 410(b) after-the-fact, e.g., due to demographic changes that occur during the year?  Could this be a result of the method they use to test 410(b)? 

I guess I will need to ask the consultant for more details, but I was wondering if anybody here has seen a safe harbor contribution fail 410(b) due to mid-year employee changes, and, if so, how do you correct the failure to give the notice?  What if the safe harbor had been a match instead of the 3% QNEC?  Something is nagging me and making think it is impossible for a safe harbor that meets 410(b) at the beginning of the year to fail it later during the year due to employee changes.

[Bird]

Definitely need more details.  Were some employees eligible and the only reason they are not getting the SH is that they didn't get the notice? (!)

On 3/3/2018 at 9:52 PM, ERISAAPPLE said:

The problem, the consultant says, is some of the employees they are going to add did not receive the safe harbor notice.

"...they are going to add..."  Very confusing.

[ERISAAPPLE]

By "the employees they are going to add" I mean the employees who are going to be given an allocation via the corrective amendment, who otherwise would not have received an allocation.

I have learned more facts. It turns out they have the 3% QNEC and an additional profit sharing contribution.  

I am thinking they had some employees who terminated with over 501 hours and a last day of the Plan Year requirement.  That could be why they failed 410(b).  Even if true, I would assume the terminated employees were given a safe harbor notice.  I realize I may need more facts, but has anyone seen a safe harbor contribution fail 410(b)?  

 

 

[Mike Preston]

You can't have an EOY employment requirement to receive a SH.  Something needs clarifying.

[BG5150]

The only way you are going to fail 410b for SH is if you fail it for 401(k), too.  Because anyone who is eligible to make a deferral gets the SH.

[Tom Poje]

maybe he means definition of comp excludes something and they fail the comp test???

[ERISAAPPLE]

OK.  I have more information.  They have the safe harbor 3% QNEC and on top of that they have a new comparability profit sharing allocation with a last day of the PY requirement.  Two employees terminated mid-year and the additional profit sharing failed 410(b) due to the last day of the PY requirement.   It turns out those employees did receive the safe harbor notice.  We just need to adopt a corrective amendment to waive the last day of the PY requirement to give those two (or maybe just one of them) the profit sharing.   But my contact confirmed they did receive the safe harbor notice.  

Sorry for the confusion.  The only information I had at first was "their safe harbor failed 410(b)...."  

[BG5150]

You test the Sh contributions with the Safe Harbor.  So, you should have 100% coverage unless you are excluding a group of employees from the plan.

You may be failing 401(a)4 testing.  That could be remedied with an 11-g amendment.

I really don't think you are failing coverage, though...

[msmith]

The only way I see this failing coverage, is if there is a classification of employees that are excluded from participating - but would have otherwise satisfied the Plan's eligibility requirements.

[Tom Poje]

in other words, 410b (in this case, for purposes of the nonelective) only asks

did you receive a nonelective (not "how much"?)

since plan is safe harbor, then the answer should yes. as noted it is a few people who received a safe harbor and not the extra profit sharing.

though the safe harbor is a QNEC, the rules are slightly different, you do not have to perform 410b test, one with QNEC and one without QNEC.  1.401(k)-3(h)(2)

if plan is cross-tested then those folks might have to be bumped up to the gateway minimum, which is a requirement, so it is possible no corrective amendment is due, simply follow the rules. if it is from 2016 then self correct under PCRS 

[ERISAAPPLE]

23 hours ago, BG5150 said:

You test the Sh contributions with the Safe Harbor.  So, you should have 100% coverage unless you are excluding a group of employees from the plan.

You may be failing 401(a)4 testing.  That could be remedied with an 11-g amendment.

I really don't think you are failing coverage, though...

This is it.  The plan failed rate group testing, which uses the 410(b) rules.  This is what the consultant meant.  Thanks.  

[BG5150]

Did they run the average benefits test?

Or, maybe the Safe Harbor-only people need to be brought up to the gateway, which the document should provide for explicitly.  No need for an 11-g amendment there...

[Mike Preston]

And, by the way, check and double-check everything this "consultant" says because if he or she is really describing a rate group test failure as a 410(b) failure you have been put on notice!!!