Loss of safe harbor status

[Carol V. Calhoun]

Plan is intended to be a safe harbor plan.  It defines compensation to exclude bonuses.  Most of the time, we would assume this is acceptable under 414(s), because bonuses are typically received disproportionately by HCEs.  But due to unusual circumstances, this turned out not to be true for 2025, a fact which they discovered only after 2025 ended.

My assumption is that this eliminates safe harbor status for 2025, and that they must now run ADP tests and take the normal steps to correct.  But is this correct?  "Dropping safe harbor status" is supposed to be prohibited mid-year, but would this be considered dropping safe harbor status or never having had it?  And if this would be considered an impermissible dropping of safe harbor status, what would the correction be, anyway?

Also, what happens for 2026?  Are they precluded from making changes for 2026 on the theory that it is a safe harbor plan for 2026 unless the compensation definition also proves to be discriminatory in 2026?  In particular, can they remove a top paid group election from the plan and/or change the definition of compensation for 2026?

[FORMER ESQ.]

Interesting fact pattern. I'm not sure that one can just ignore a plan document that is intended to be a safe-harbor by stating "oh well," we used a non 414(s) compliant compensation definition, so it's not really a safe harbor, and we will run ADP/ACP. That would constitute an operational failure--not running the plan as a safe-harbor plan. The correction, it would seem to be, is to retroactively amend the plan document to a 414(s) definition that you know will meet a safe-harbor compensation definition (e.g., W-2) and therefore SH compliant, and then make corrective contributions for any potential missed deferral opportunities and safe-harbor contributions under EPCRS. Of course, your idea of just moving on with the ADP/ACP for 2025 would likely be less expensive and for the record, I prefer it. But, it just doesn't feel "right."

[justanotheradmin]

Is there a basic plan document? I have seen some that address SH accruals when 414(s) does not pass. It defaults to a 415 definition of compensation as a fall back. 

[FORMER ESQ.]

That's great to know. But, they have not been operating the plan using a 415 definition, so there is still the possible need to go back and make corrective contributions.