Safe Harbor 401(k) Plan/Failed 414s compensation test

[rew]

It appears from my research that a safe harbor 401(k) plan that uses the 3% nonelective contribution on plan compensation that does not satisfy the "safe harbor" definition of compensation and fails the 414s compensation test is a problem.

It appears the method of correction is to base the 3% safe harbor contribution on a "safe harbor" definition of compensation which may or may not need an amendment depending on how the plan is written.

I am wondering if there are any alternatives other than having the employer deposit additional contributions.  For example, can one run the ADP Test on the basis of a "safe harbor" defn of compensation?

To illustrate, a plan defines compensation to exclude bonuses and OT pay. a participant earns $70,000 of total compensation of which $20,000 is excluded as OT pay.  The participant defers 5% of pay, or $2,500 (i.e. $50,000 x 5%).  The company deposits a 3% safe harbor amount of $1,500 (i.e. $50,000 x 3%).  At year end, it is determined the plan defn of compensation fails to satisfy 414s.  Must the employer deposit an additional $600 (i.e. $20,000 excluded pay x 3%) or can they first run the ADP Test on the basis of full compensation.  Is it possible for the employer to first run the ADP Test on basis of using the total wage (i.e. the participant defers 3.57%, calculated as $2,500/$70,000) to see if the ADP Test is satisfied?  If it is possible to run the ADP Test and it fails, may the plan be remedied by having the affected HCEs receive a refund of the excess deferrals on this basis?

 

 

[justanotheradmin]

Once a plan is safe harbor, it needs to comply with the rules. Running the ADP as an alternative to the ADP test isn't an option. If it were, more plans (especially small ones) would roll the dice if they knew they could just do ADP testing as a fall back. 

The plan needs to fix its compensation issue, not run the ADP test. 

[Kevin C]

Before you start on a correction, I would suggest taking another look at the plan document to see if it addresses your situation. The base document for our PPA VS document has the following:

Quote

If the Employer elects to apply a definition of Plan Compensation under a Safe Harbor 401(k) Plan that does not satisfy a nondiscriminatory definition under Code §414(s) for a given Plan Year, the Employer will be deemed to have elected to use Total Compensation for purposes of determining the Safe Harbor/QACA Safe Harbor Contribution under the Plan for such Plan Year.

 

[austin3515]

Kevin C, Is tha ASC again?  Corbel told me to embed that language in the special provisions.

[Kevin C]

13 hours ago, austin3515 said:

Kevin C, Is tha ASC again?  Corbel told me to embed that language in the special provisions.

Yes.  It was added to avoid the need for a corrective amendment if the safe harbor compensation definition didn't satisfy 414(s).  At the time it was submitted to the IRS, some in the field were claiming you couldn't do an -11(g) amendment for a safe harbor 401(k). 

[austin3515]

Very impressive work from that group.

[Belgarath]

Austin - what document are you using, and when you say embed in the "special provisions" - where exactly do you mean? In the "other" section of the compensation definition in the AA, or in an Appendix, etc.?

[rew]

Thanks for your input.  At first glance, I could not find any language in the plan document about using a safe harbor defn of compensation.  Will review further.

[austin3515]

1 hour ago, Belgarath said:

n the "other" section of the compensation definition in the AA, or in an Appendix, etc.?

Correct, in the "Other" section.  That was their solution when I brought this up to them a couple of years ago.

[Belgarath]

Thanks Austin.

[rew]

I received the following reply from the attorney of our document provider:

You are correct on both counts. The definition of compensation used for the safe harbor contribution must pass 414(s) testing and our document does not contain fail safe language for 414(s) failures (the IRS does not allow 414(s) failsafe language in pre-approve documents). 

 

From above comments, it appears that some pre-approved documents have fail safe language the IRS allowed. 

 

[Belgarath]

I wonder...even if a document failed to have language such as Austin and Kevin mentioned - if you failed 414(s) testing and just operationally used full comp - if most auditors would ever pick this up. I'm obviously not recommending avoiding proper "form" in the document language, or corrective amendments if necessary, etc. - just musing... 

[Belgarath]

Just curious to explore this a bit further. So what is the opinion as to whether an 11(g) amendment is permissible in a safe harbor plan if 414(s) testing fails - that is, does it retain safe harbor status if the 11(g) amendment is used? It doesn't really make any sense (to me) that safe harbor status should be lost since merely reverting to ADP testing isn't an option, but I'm not aware of this being specifically addressed.