Safe Harbor non-elective payments

[bobbyM35]

I left a company in September 2017.  Their practice was to pay Safe Harbor non-elective payments to 401k plans the year after service.  I contacted them recently to find out when the contribution would be made to my 401k plan for my 2017 service and they told me that no further contributions were expected to be made into the account. So essentially I received no contribution for my 2017 service.  My question is, what recourse do I have in this situation?  I checked my SPD and the only verbiage I could find on the payment is the following:

"Your Employer will make Safe Harbor Nonelective Employer Contributions to all eligible Participants who are Non-Highly Compensated Employees if you were eligible to participate in the Plan during the Plan Year.

These contributions satisfy certain Internal Revenue Code requirements and eliminate the need for the Plan to perform certain non-discrimination annual tests. You will be 100% vested in these contributions when made. These contributions may be distributed under the same circumstances which allow your Deferral Contributions to be distributed (i.e., death, disability, separation from service, and termination of the Plan without the establishment of a successor plan) but you may not request a hardship withdrawal of these contributions. In addition, prior to the beginning of each Plan Year for which this election to make Safe Harbor Nonelective Employer Contributions continues to apply, the Plan Administrator will provide written notice to you describing your rights and obligations under the Plan and informing you that the Plan may be amended during the Plan Year to provide that the Employer has elected to make a Safe Harbor Nonelective Contribution of at least 3% to the Plan for the Plan Year."

What are annual requirements necessary to qualify for Safe Harbor Nonelective contributions?  I would think service through September should be sufficient.  Is it a % of the year worked, something else?

TIA for any help.

[ratherbereading]

I think the key words are:  may be amended. It sounds like the safe harbor feature is the flexible safe harbor, which means your employer can choose each year whether to make it. Did you get a notice around November of last year stating the company would not be making a safe harbor contribution for 2017?  

12 minutes ago, bobbyM35 said:

the Plan may be amended during the Plan Year to provide that the Employer has elected to make a Safe Harbor Nonelective Contribution of at least 3% to the Plan for the Plan Year."

 

[Kevin C]

The supplemental notice is only required if they are going to be safe harbor for the year.

bobby,  what CEW is referring to is a way the regulations allow a plan sponsor to decide during the plan year if they will be making the 3% safe harbor contribution for that year.  They send a safe harbor notice before the beginning of the plan year that says they may make the 3% safe harbor contribution for that year.  Then, they have until December 1 to decide if they will be safe harbor for the year.  If they do make the safe harbor contribution, they are required to send a supplemental notice by December 1 saying the 3% safe harbor contribution will be made for that year.

Do you still have the safe harbor notice they sent you around November 2016?  The SPD language isn't clear because it first says they will make the 3% safe harbor contribution, then it says they may amend during the year to provide for the contribution.  To make things more confusing, some plan documents have provisions where the 3% safe harbor contribution is only made in years they provide the supplemental notice to participants.   If you can get copies of the safe harbor notices for the 2017 year, they should tell you what is supposed to happen.

[Belgarath]

I agree with CEW, but be aware that a notice saying they were NOT contributing is not required, even though many employers do it. In other words, the plan is NOT a safe harbor for a given year UNLESS the employer makes the election to make it a safe harbor for a given year.

Ok, I see Kevin already mentioned this!

[bobbyM35]

I may not have been clear on this.  They are making safe harbor payments to employees for 2017 service; I have confirmed this with other current employees.  They have just told me that they would not be making a contribution to my account.  I plan on trying to get clarity on why they think that is justified.  I don't know what plan requirements are for payment to recipients, if that is administered by ERISA/IRS requirements.  If there is a % of work year worked requirement or something along those lines.  Basically, I would like to be educated in what the laws are for paying an ex-employee the safe harbor non-elective payment going into any conversation we have.

 

And no, I did not receive a notice that the company would not be paying a 2017 safe harbor election.

[ratherbereading]

If what you are saying is true then I'm not sure why you would not get one.  There is no last day or hour requirement for a safe harbor contribution.  If they are making a safe harbor contribution for 2017 and you were there during 2017, even if you worked for 6 weeks, you should get on.  I'd definitely talk to your HR department.

[WCC]

3 hours ago, bobbyM35 said:

"Your Employer will make Safe Harbor Nonelective Employer Contributions to all eligible Participants who are Non-Highly Compensated Employees if you were eligible to participate in the Plan during the Plan Year.

Did you earn more than $120,000 during 2016?

[bobbyM35]

Yes I did.  Is that a basis for exclusion?  If so, can they selectively exclude on that basis?  If other highly compensated employees are receiving a SHNE contribution could they exclude my contribution on that basis?

[WCC]

Yes they can exclude highly compensated employees from receipt of the safe harbor contribution. Based on the SPD wording you provided, it seems to be a blanket exclusion for all HCE's - it is not selective. Generally speaking, plans either exclude all HCE's or none. Maybe others on this board have plans that exclude HCE's by name to make it more selective, my plans do not.

Keep in mind highly compensated employees are based on either compensation or ownership percentage.  Compensation is based on the look back year. For example, what you made in 2016 determines if you are a HCE for 2017. So if your friends/co workers were under $120,000 in 2016 they are not HCE's for 2017 (regardless of how much money they make in 2017).

[CuseFan]

no, but just because they may also get a 3% contribution, that may be a profit sharing contribution for the HCE group rather than a safe harbor, and the rules for that are different.

[CuseFan]

18 minutes ago, bobbyM35 said:

If other highly compensated employees are receiving a SHNE contribution could they exclude my contribution on that basis?

to clarify, my "no" was to this question, not your first one.

[bobbyM35]

Apparently, the HCE rule is the issue they are using

This was the company's response:

Under the rules, the Employer is required to make certain minimum contributions to each of the NHCEs but is allowed total discretion on the amount, if any, to be contributed to each of the HCEs, as long as the Employer Contributions are not discriminatory against NHCEs in favor of HCEs. 

Using these rules, guidelines and discretionary judgment, (Company) determines the Employer contributions.  It has been (Company)’s general practice to limit Employer contributions to those HCEs who continue to be employed at (Company) at the time the contributions are funded.   The 2017 contributions have not yet been funded to any of the participants yet.

Can they discriminate between out of service and in service HCEs?  I know they plan on giving HCEs their SHNE contribution.  Do I have any recourse here?

[Kevin C]

It is possible to exclude some highly compensated employees from the safe harbor contribution, but give it to others, IF that is what the plan document says.  The document we use has an option in the adoption agreement that lets you give the safe harbor contribution to highly compensated employees who are not key employees, but not to the other HCEs.  I don't see why they couldn't exclude HCEs who are not employed on the last day of the plan year, but provide it to the other HCEs. However, the plan document must say they can do it. 

The plan provisions should be described in the SPD, but the plan document language will determine how it works.  As a participant, you have the right to request a copy of the plan document, but they can charge a reasonable copying charge. The plan sponsor is also supposed to have a copy of the document  available for inspection.    If you want to proceed, you should request a copy of at least  the plan document sections dealing with the safe harbor.  It wouldn't hurt to ask if they have an electronic copy of the document.

[PensionPro]

6 minutes ago, bobbyM35 said:

Can they discriminate between out of service and in service HCEs?  

In theory, yes.  However, the plan needs to contain provisions stating who receives the employer contributions, and that information is required to be disclosed to you in the SPD and in the annual safe harbor notice.  Did you receive the annual safe harbor notice for 2017?  If not, you should request a copy.

 

7 minutes ago, bobbyM35 said:

Do I have any recourse here?

If the plan reflects the employer's practice and you received the proper notices, then no.  Otherwise the DOL is the agency for administering and enforcing participant righyts.

[bobbyM35]

Here is the verbiage I could find in the SPD that treats contributions to HCEs.  I don't see anywhere in this that they can discriminate between active / non-active HCEs, but I could be wrong.

Your Employer may make discretionary nonelective contributions in an amount to be determined by the Board of Directors for each Plan Year.
a. Ratio of Compensation Formula

Nonelective contributions, if any, made to the Plan by your Employer shall be allocated to your Account based upon the ratio that your Compensation bears to the Compensation of all eligible employees within the group of eligible employees to which you belong. Each employee will be considered his or her own group.

For additional information regarding the computation of this benefit, please contact the Plan Administrator.

[PensionPro]

Just now, bobbyM35 said:

Here is the verbiage I could find in the SPD that treats contributions to HCEs.  I don't see anywhere in this that they can discriminate between active / non-active HCEs, but I could be wrong.

Your Employer may make discretionary nonelective contributions in an amount to be determined by the Board of Directors for each Plan Year.
a. Ratio of Compensation Formula

Nonelective contributions, if any, made to the Plan by your Employer shall be allocated to your Account based upon the ratio that your Compensation bears to the Compensation of all eligible employees within the group of eligible employees to which you belong. Each employee will be considered his or her own group.

For additional information regarding the computation of this benefit, please contact the Plan Administrator.

Discretionary nonelective contributions are different from safe harbor nonelective contributions.  The section you cited does not seem to relate to safe harbor nonelective contributions.  The annual safe harbor notice might be more helpful.

[bobbyM35]

I don't think I was provided the annual safe harbor notice.  I was only provided the SPD.

[PensionPro]

You should request it.

https://www.irs.gov/retirement-plans/notice-requirement-for-a-safe-harbor-401k-or-401m-plan

 

[PensionPro]

 

1 hour ago, bobbyM35 said:

It has been (Company)’s general practice to limit Employer contributions to those HCEs who continue to be employed at (Company) at the time the contributions are funded.  

Maybe others on this board can chime in.  In my opinion,

The employer can not exclude certain HCEs administratively without properly reflecting such provision in the plan document, SPD, and annual safe harbor notice. 

It is questionable if they can include a provision that limits contributions to those HCEs who are employed at the time the contributions are funded.

[Lou S.]

It is pretty simple for the company to exclude 'some' HCEs by having a cross tested formula that has everyone in their own rate group and then just have a resolution saying which HCEs are getting a 3% PS contribution. I'm pretty sure that will always pass testing since 100% of the eligible NHCEs are getting a 3% safe-harbor non elective so you'll always pass the ratio percentage test at 100% or more.

I'm guessing the plan is drafted correctly, but that could be a bad assumption on my part.

That is to say bobbyM35 the company probably can get away without giving you any additional contribution but as others have suggested getting a copy of the safe harbor notice would be a good start.

 

[Kevin C]

17 hours ago, bobbyM35 said:

Nonelective contributions, if any, made to the Plan by your Employer shall be allocated to your Account based upon the ratio that your Compensation bears to the Compensation of all eligible employees within the group of eligible employees to which you belong. Each employee will be considered his or her own group.

 

This part says they can determine the profit sharing contribution separately for each person. The allocation must pass discrimination testing.  But, the rules are designed to prevent discrimination in favor of HCEs.  There is nothing in the rules that prevents discrimination against HCEs.  So, yes, they can decide that you do not get a profit sharing contribution for 2017 and still give it to other HCEs.

 

[Mike Preston]

Just to come full circle, keep in mind that the provisions of the plan which allow the employer to pick and choose (within limits) who receives a profit sharing contribution (otherwise known as "employer non-elective" contributions) are completely independent and do not influence the plan's provisions regarding safe-harbor contributions.  While the plan can have safe-harbor provisions which vary by HCE status, it can NOT have provisions which vary by hours worked or employment status. 

It is not a good sign for the OP that he did not receive a safe-harbor notice as it implies that when the safe harbor notice was distributed the employer was aware of his HCE status for the upcoming year and that the plan's provisions work to exclude him.

Nothing in the above is meant to disuade the OP from getting a copy of the actual plan's provisions regarding safe harbor contributions.

As an aside, I think the IRS would have a field day if they found out that the employer was using employment status on post-End-of-year contribution date to determine or select those entitled to a profit sharing contribution.  At the very least it does not satisfy the definition of a reasonable classification and therefore the average benefits test is unavailable to the plan sponsor when determining compliance with the coverage rules.  But even if that is not of concern to the employer (such as would most likely be the case if the only people chosen to receive nothing are HCE's), there is no doubt in my mind that the IRS would consider it a violation of the definitely determinable rules. Remember when "everybody in their own group" was not allowed in pre-approved plans specifically because the IRS was concerned with the definitely determinable rules?  Just because the IRS eventually allowed the provisions in pre-approved plans does not mean that there is no way to violate them: and this plan sponsor is playing with fire.

[K2retire]

On 7/26/2018 at 1:44 PM, Mike Preston said:

As an aside, I think the IRS would have a field day if they found out that the employer was using employment status on post-End-of-year contribution date to determine or select those entitled to a profit sharing contribution.  At the very least it does not satisfy the definition of a reasonable classification and therefore the average benefits test is unavailable to the plan sponsor when determining compliance with the coverage rules.  But even if that is not of concern to the employer (such as would most likely be the case if the only people chosen to receive nothing are HCE's), there is no doubt in my mind that the IRS would consider it a violation of the definitely determinable rules. Remember when "everybody in their own group" was not allowed in pre-approved plans specifically because the IRS was concerned with the definitely determinable rules?  Just because the IRS eventually allowed the provisions in pre-approved plans does not mean that there is no way to violate them: and this plan sponsor is playing with fire.

Unless the profit sharing contributions require 1000 hours and/or last day employment as is relatively common.

[Mike Preston]

21 hours ago, K2retire said:

Unless the profit sharing contributions require 1000 hours and/or last day employment as is relatively common.

Huh? 

[RatherBeGolfing]

On 7/26/2018 at 2:44 PM, Mike Preston said:

At the very least it does not satisfy the definition of a reasonable classification and therefore the average benefits test is unavailable to the plan sponsor when determining compliance with the coverage rules.

Bingo.  

[Bill Presson]

22 hours ago, K2retire said:

Unless the profit sharing contributions require 1000 hours and/or last day employment as is relatively common.

 

1 hour ago, Mike Preston said:

Huh? 

Mike, just because everyone is in their own group, it doesn't mean they aren't also using allocation requirements for the PS contribution. K2retire is just saying that the OP might not have gotten the PS because he wasn't employed at year end and that might be a plan design, not an employer decision.

[bobbyM35]

Thank you all for your assistance and responses!  My former employer has insisted that they have discretion whether or not to pay HCEs (although they have not provided the justification nor shown me verbiage in the SPD when I requested).  They have agreed to pay me as a "one-off exception".  I'm not going to pursue the matter further if they provide the contribution, but it doesn't seem right to me.

[Mike Preston]

On 7/31/2018 at 7:26 AM, Bill Presson said:

 

Mike, just because everyone is in their own group, it doesn't mean they aren't also using allocation requirements for the PS contribution. K2retire is just saying that the OP might not have gotten the PS because he wasn't employed at year end and that might be a plan design, not an employer decision.

But that is focusing on the profit sharing allocation and not the safe harbor.  My entire comment was geared toward the safe harbor contribution.  To circle back to the regular profit sharing is a non-sequitur, But just to be clear, if the employer is determining eligibility for the regular profit sharing contribution or determining eligibility for the safe harbor contribution based on employment status at time of contribution and that time is after the end of the plan year the plan will fail scrutiny if the IRS examines whether contributions satisfy the IRS' rules regarding definitely determinable benefits.  Note that the above concedes the issue that the plan document somehow provides the flexibility described.

[Bill Presson]

On 8/5/2018 at 11:16 AM, Mike Preston said:

But that is focusing on the profit sharing allocation and not the safe harbor.  My entire comment was geared toward the safe harbor contribution.  To circle back to the regular profit sharing is a non-sequitur, But just to be clear, if the employer is determining eligibility for the regular profit sharing contribution or determining eligibility for the safe harbor contribution based on employment status at time of contribution and that time is after the end of the plan year the plan will fail scrutiny if the IRS examines whether contributions satisfy the IRS' rules regarding definitely determinable benefits.  Note that the above concedes the issue that the plan document somehow provides the flexibility described.

Mike, go back and read your posts and the response. You specifically said "as an aside..." and then discussed 1000 hour and year end requirements for PS contributions. That's what K2 quoted and responded to. When you said "huh", I clarified.

[Mike Preston]

4 hours ago, Bill Presson said:

Mike, go back and read your posts and the response. You specifically said "as an aside..." and then discussed 1000 hour and year end requirements for PS contributions. That's what K2 quoted and responded to. When you said "huh", I clarified.

My turn to ask you to go back and read my posts.  My "aside" is saying that it makes no nevermind what the document allocation requirements are (and everybody in their own group and 1000 hours and EOY employment, etc., etc.) if the plan sponsor is using employment status at date of contribution and that date is after the end of the year to determine who gets a slice of the proverbial pie that plan WILL be disqualified as it doesn't satisfy the definitely determinable rules. Toodles.