Mid-Year Safe Harbor Changes

[austin3515]

Can I amend a 3% Safe Harbor Plan to exclude different items of compensation prospectively mid-year?  I cant find anything on point but it feels like a back door reduction in the SHNEC, the consequence of which of course is to blow my safe harbor for the year.

Has this been addressed anywhere? I'm just surprised that no one ever wrote in one of these articles "Be careful!  If you amend to reduce eligible comp that is a de facto reduction the contribution formula!"

[FORMER ESQ.]

Compensation counted under a safe-harbor 401(k) plan must meet one of the 414(s) definitions. Depending on what is being excluded, you may find yourself having to rely on the ambiguous "reasonable non-discriminatory" definition of compensation under 414(s). Putting that hurdle aside, if the effect of the change in definition of compensation is to reduce the employer's nominal SHNEC (especially so if the SHNEC is for NHCEs only), it certainly violates the spirit of Notice 2016-16, even if you cannot find anything directly on point. Your gut instinct is correct on this one. 

[MWeddell]

It can't be done under Notice 2016-16 because the change in compensation would reduce the safe harbor contributions.  See Section B(iii) of the Notice.  See also Section D.4 of the Notice that fairly clearly implies that a reduction in the compensation definition is covered by that prohibition.  So it can only be done mid-year to the extent the regulations permit it.

[FORMER ESQ.]

4 hours ago, MWeddell said:

It can't be done under Notice 2016-16 because the change in compensation would reduce the safe harbor contributions.  See Section B(iii) of the Notice.  See also Section D.4 of the Notice that fairly clearly implies that a reduction in the compensation definition is covered by that prohibition.  So it can only be done mid-year to the extent the regulations permit it.

MWeddell, thank you. I did not have the Notice in front of me, which is why I replied that even if there is nothing directly on point in the Notice, it violates the rationale behind the Notice and should be avoided. 

[austin3515]

B(iii) at best implies it cannot be done. And D.4 is just regarding the match.

Like I said I agree compeltely that it would reduce the safe harbor.  I'm just a little floored that they don't say "(including an amendment to the definition of compensation that reduces the amount of compensation that would receive the Safe Harbor)" or something like that.  I don;t think it's SO obvious that it's not even worth stating anywhere.  Why leave it just implied instead of outright saying it?

[FORMER ESQ.]

10 minutes ago, austin3515 said:

Why leave it just implied instead of outright saying it?

Well, if they did that, it would reduce the need for CPAs and attorneys. Look at the bright side! 

[Kevin C]

1.401(k)-3(g)(1)(ii) has the rules for a mid-year amendment that reduces safe nonelective safe harbor contributions.  I read it as applying in your situation.  Note that it isn't limited to just formula changes.  The only way they will be able to stay safe harbor is if the amendment only applies to HCEs (Notice 2020-52). 

They could also be SH if they do a later amendment to retroactively reinstate the SHNEC under Notice 2020-86 Q&A 8, but that probably defeats the purpose of the amendment.

Cite typo corrected

[FORMER ESQ.]

Kevin, I don't even see 1.401(k)-3(e)(1)(ii) in my Reg. book. Is your cite accurate? Thanks.

[FORMER ESQ.]

30 minutes ago, Kevin C said:

Notice 2020-86 Q&A 8

However, this implies that a mid-year amendment that reduces SHNECs would violate the safe harbor rules. 

[Kevin C]

Thanks, I fixed the cite above.

The regs for reducing or suspending the SH are an exception to the mid-year amendment rules. You lose the SH, but don't disqualify the plan.