Suspend Safe Harbor for HCEs / Preserve SH

[austin3515]

I read somewhere along the way that perhaps you could amend a safe harbor plan to eliminate prospectively the SH for the HCE's and preserve the safe harbor status.

Is that possible?  Anyone looked into that?

[C. B. Zeller]

If they're not eligible yet, then you can prospectively eliminate their eligibility. However 2016-16 prohibits a mid-year amendment which narrows the group of employees eligible for the SH, HCEs or not.

[austin3515]

grrr.  I gotta get on the horn with my Senator.  This is so stupid!  I have a large client whose only option is to terminate their plan to avoid the damn top-heavy minimum.

[thepensionmaven]

I think we all should give them a call.  There are going to be a lot of plans in this position; and unfortunately, it does appear that termination is the only way to go.

[LMK TPA]

If a Safe Harbor Plan terminates mid-year, the plan will retain its safe harbor status and top-heavy exemption for the plan year of termination as long as the termination is due to a substantial business hardship or there is an acquisition or disposition.  I would assume that businesses will cite a substantial hardship for terminating the plan.  I'm not sure what the definition of substantial hardship is.  If the business terminates the plan and the substantial hardship isn't the reason or it cannot be proved, I believe the plan will be subject to the top-heavy rules. 

Any comments on this are appreciated.

[Gilmore]

Not questioning CB at all, but I did notice the other day that the EOB, Ch 11, Section XIV, Part B4 still expresses an opinion that the plan should retain safe harbor status if only HCEs are prospectively amended out of the plan.  It's the online version so should be the latest.  I'm wondering if that was an oversight not corrected after 2016-16, or if the author still considers that valid.

[austin3515]

Thank you Gilmore, that;s where I read it!  I couldn't remember where I had seen it...

[austin3515]

4 hours ago, thepensionmaven said:

I think we all should give them a call.  There are going to be a lot of plans in this position; and unfortunately, it does appear that termination is the only way to go.

https://araadvocacy.org/issues/coronavirus/#/23/

ARA sent this out today.  You can send their letter to your congress people.  Everyone should have everyone they know sign this.

[C. B. Zeller]

1 hour ago, Gilmore said:

Not questioning CB at all, but I did notice the other day that the EOB, Ch 11, Section XIV, Part B4 still expresses an opinion that the plan should retain safe harbor status if only HCEs are prospectively amended out of the plan.  It's the online version so should be the latest.  I'm wondering if that was an oversight not corrected after 2016-16, or if the author still considers that valid.

I agree that they can be prospectively eliminated if they have not yet entered the plan, I'm not sure if that's what EOB is referring to there. My copy of the EOB is in dead tree form and sitting in an office which I don't expect to return to any time soon, so I can't reference it, but I am not aware of any superseding guidance. The plain language of 2016-16 pretty clearly prohibits any "mid-year change to reduce the number or otherwise narrow the group of employees eligible to receive safe harbor contributions."

I can see an argument in favor of allowing it though. Since a SH plan is not required to provide the SH to HCEs, you could structure a plan to provide that the SH is given to NHCEs and a separate, 100% vested match with the same formula is given to the HCEs. There would be no functional difference between this and a safe harbor plan that covered all employees, except that the match for the HCEs could be eliminated mid year. If you can do that, why shouldn't the option be available to all SH plans without the extra complexity?

[Gilmore]

I just sent a request for clarification to the author.  I will try to remember to follow up here when I get a response.  You are correct, though, 2016-16 does seem pretty straightforward.

[Luke Bailey]

Can't you read the reg in such a way that contributions for HCEs that may have outward appearance of SH based on plan wording and the way they are calculated are really not safe harbor contributions? 1.401(k)-3(b) and (c) refer only to making SH contributions for NHCEs. In fact I don't think the regs really ever define "safe harbor contributions," but rather describe contributions that, when made for NHCEs, "satisfy the safe harbor contribution requirement." The rules in regs and 2016-16 that say what you can't change refer to not changing the safe harbor contributions, but if the contributions for HCEs are not really safe harbor, no problem.

This essentially says that what C.B. Zeller points out you can do if you're clever enough to draft it that way is, in fact, what you can do anyway/already. Will be interested in any authority otherwise.

[Gilmore]

Sorry I forgot to get back to this.  The answer that I received regarding the EOB is that the author is less inclined to support eliminating the safe harbor for HCEs mid year and still retain safe harbor status for safe harbor match plans.  He did actually mention your argument Luke, but said the IRS may not see it that way and would err on the side of caution and do the ADP/ACP test.

[Luke Bailey]

Thanks very much for the info, Gilmore. If I had to, I would do more research, in particular to make sure that there is no definition of safe harbor contributions in regs that would clearly be based on how they are calculated, rather than whom they would go to. I would also carefully check plan document and SPD and SH notice, because it is possible that there would be some foot shooting in one of those. But in the right circumstances, I would bet on my argument. And certainly, as CBZ pointed out, you can draft around it in a completely superficial way if you're clever enough.

[MWeddell]

I looked into this a couple weeks ago thoroughly and came to Luke's conclusion.  If one tracks the cross-references from Notice 2016-16 to the 401(k) regulations, I found that "safe harbor contributions" are the contributions required for the NHCEs and that contributions made to the HCEs (even though the plan document and the SPD might call them safe harbor contributions) are not safe harbor contributions.  Therefore, the barrier against a mid-year reduction or suspension in contributions doesn't apply to the HCEs.  One still has to provide a supplemental participant safe harbor notice 30 days or more before the effective date that the contributions to HCEs are reduced.

[Luke Bailey]

4 hours ago, MWeddell said:

I looked into this a couple weeks ago thoroughly and came to Luke's conclusion.  If one tracks the cross-references from Notice 2016-16 to the 401(k) regulations, I found that "safe harbor contributions" are the contributions required for the NHCEs and that contributions made to the HCEs (even though the plan document and the SPD might call them safe harbor contributions) are not safe harbor contributions.  Therefore, the barrier against a mid-year reduction or suspension in contributions doesn't apply to the HCEs.  One still has to provide a supplemental participant safe harbor notice 30 days or more before the effective date that the contributions to HCEs are reduced.

Yeah, I think that's right, MWeddell. Thanks.

 

[Bird]

 

16 hours ago, MWeddell said:

If one tracks the cross-references from Notice 2016-16 to the 401(k) regulations, I found that "safe harbor contributions" are the contributions required for the NHCEs and that contributions made to the HCEs (even though the plan document and the SPD might call them safe harbor contributions) are not safe harbor contributions.  Therefore, the barrier against a mid-year reduction or suspension in contributions doesn't apply to the HCEs.  One still has to provide a supplemental participant safe harbor notice 30 days or more before the effective date that the contributions to HCEs are reduced.

I dunno, regardless of how carefully you parse the notice and regs, our plan language is pretty clear that HCEs are (or are not) excluded from the term "Eligible Employee."  I don't see how you could change that definition mid-year - it's one thing to discriminate against HCEs, and it's another to cut back their benefits.

For the record, most of our plans use the "maybe"notice which if push comes to shove, you could try to argue that nobody has accrued anything until the plan is amended in November, but that is a real shove.  More and more we are excluding HCEs from the SHNE and making it up as PS, although that has its downsides too.

[MWeddell]

Well, one can't cut back on a protected benefit.  So I am only suggesting that contributions to HCEs could be reduced prospectively.  The safe harbor participant notice's required contents includes a description of other contributions and the conditions under which they are made, so one would first have to distribute a supplemental participant notice at least 30 days before the effective date of the change.  In short, there are restrictions, but one can do it without losing the safe harbor status for the plan year. 

[Luke Bailey]

Agree with MWeddell, apply prospectively. Will of course need to tailor solution based on plan language. Going forward, plan language should be sensitive to issue and better interpretation of regulation.

[Kevin C]

I think you have a problem in the language in 1.401(k)-3(e)(1).

Quote

Except as provided in this paragraph (e) or in paragraph (f) of this section, a plan will fail to satisfy the requirements of sections 401(k)(12), 401(k)(13), and this section unless plan provisions that satisfy the rules of this section are adopted before the first day of the plan year and remain in effect for an entire 12-month plan year. In addition, except as provided in paragraph (g) of this section or in guidance of general applicability published in the Internal Revenue Bulletin (see §601.601(d)(2)(ii)(b) of this chapter), a plan which includes provisions that satisfy the rules of this section will not satisfy the requirements of §1.401(k)-1(b) if it is amended to change such provisions for that plan year.  ...

I see the choice about who receives the SH as part of the provisions that satisfy 1.401(k)-3.  The regs clearly say except as provided in (g) those provisions must remain in effect for the entire plan year or the plan doesn't satisfy 1.401(k)-1(b). Satisfying 1.401(k)-1(b) is a qualification requirement.  Unless the IRS comes out with guidance saying you can eliminate the safe harbor contribution for HCEs mid-year, I see it as falling under paragraph (g) which means the safe harbor is gone.

If it's that important, change the plan year.  Have a short plan year from 1/1/2020 to 4/30/2020 and then have a 5/1/20 - 4/30/21 plan year with just the NHCEs getting the SH.  1.401(k)-3(e)(3) says you have to be SH for the year before and after the short year to be SH for the short year. It doesn't say the SH provisions have to be the same for those years.  Why risk disqualifying the plan when there is another option that accomplishes the desired goal without the risk?

[MWeddell]

19 minutes ago, Kevin C said:

Unless the IRS comes out with guidance saying you can eliminate the safe harbor contribution for HCEs mid-year, I see it as falling under paragraph (g) which means the safe harbor is gone.

IRS Notice 2016-16 fulfills this requirement. 

- Section III.B(iii) does not apply because the contributions to HCEs are not safe harbor contributions, although one has to look up several cross-references in the regulations to verify this.

- The conditions listed in Section III.C apply because this is a change in contributions (other than the safe harbor contributions) and that's one of the items that is required to be in a participant safe harbor notice.

[Kevin C]

1 hour ago, MWeddell said:

- Section III.B(iii) does not apply because the contributions to HCEs are not safe harbor contributions, although one has to look up several cross-references in the regulations to verify this.

I wouldn't want to bet on how well your creative interpretation will work on the IRS with a plan document that calls it a SH contribution, applies all of the requirements of a SH contribution to it and includes it in the SH provision section, like our VS document does.

Also, from Derrin Watson's COVID-19 Q&As:
 

Quote

 

Q. What about just eliminating the SH match for HCEs or a subset of HCEs?

That’s a suspension. The NHCEs will thank you but it earns no brownie points with the regulations. However, the NHCE contributions will count towards the top heavy minimum, and QNECs (alias safe harbor nonelective contributions) can be used to satisfy the current-year ADP test.

 

http://www.erisapedia.com/static/Covid19Webcast2020_04Questions.pdf  (page 18)

[MWeddell]

We won't agree 100% of the time.  At least we've laid out the opposing arguments so that other readers can decide.

Of course, I'm not trying to make a "creative interpretation," just trying to make a correct interpretation.  Those of us who aren't practicing law also should suggest that the employer review the issue with their legal counsel.

[austin3515]

I will just add that a company in financial distress who makes a good faith interpretation of the rules intended to benefit its lower paid employees should be viewed especially favorably in these incredible times.  IT would be bazaar to penalize a company that maintained such a generous match when the you know what is is hitting the fan. 

Are there any IRS Q&As coming up?  Boy would this be a great question for that.

[Kevin C]

If you are going to take the position that the contribution going to the HCE's is not a safe harbor contribution, keep in mind that your position also means the top heavy exception for safe harbor plans does not apply, because an employer contribution other than the SH contribution was allocated for the year. 

Austin,  You may get "guidance of general applicability published in the Internal Revenue Bulletin" [1.401(k)-3(e)(1)] providing the relief you seek. It wouldn't hurt to send the IRS a letter asking for it.

[Luke Bailey]

6 hours ago, Kevin C said:

I think you have a problem in the language in 1.401(k)-3(e)(1).

I don't. It's only a problem if you see the contributions that are for HCEs that are calculated in the same way as SH's as "provisions that satisfy the rules of this section," but clearly they're not that, because if when you drafted your plan or filled out your adoption agreement you had said "no" to SH contributions for HCEs, your SH plan would still have all the "provisions that satisfy the rules of this section" and be a SH plan.

 

6 hours ago, Kevin C said:

I see the choice about who receives the SH as part of the provisions that satisfy 1.401(k)-3.

Right. That's one way of articulating the difference between our positions. I don't see them as that, and since you didn't need to make SH applicable to HCEs in the first place, I think my position is more consistent with reg language.

 

3 hours ago, Kevin C said:

I wouldn't want to bet on how well your creative interpretation will work on the IRS with a plan document that calls it a SH contribution, applies all of the requirements of a SH contribution to it and includes it in the SH provision section, like our VS document does.

Sure. Ill-considered plan language could make it more of an uphill battle than it otherwise would be. Would need to review actual plan language to assess risk, with IRS or court. I would think an EP exams agent would be pretty sympathetic, given that it only impacts HCEs and is for business survival, and  I also think Appeals and higher would agree with my (and MWeddell's) position on the legal issue. It would seem to me the greater risk would probably come from the disgruntled physician, investment banker, or lawyer (god help us from those!) who terminates employment after SH-like contributions are stopped for HCEs.