Can a calendar year 401(k) plan be made safe harbor 401(k) by distribu

[John A]

Can an existing calendar year 401(k) plan be treated as a safe harbor 401(k) plan right now (for 2001) if the required notices are distributed immediately, and the plan is amended to include the safe harbor provisions by the end of the remedial amendment period?

[Guest]

my understanding is notices were to be given by Dec.1

(That doesn't mean things are always followed through, but thats the regs)

If the plan was to use the 3% non elective safe harbor, all the notice has to say is 'We may go safe harbor 3%' and then by the following Dec 1 state if they actually will allocate the 3% nonelective, and amend the plan at the same time. and this strategy can be used every year, (I imagine depending on whether the plan needs the 3% to pass.)if the plan is top heavy, I would think the 3% would be ade permanent just so no amendment is needed.

so what happens if you give notice today Dec 5? well technically you are a couple of days late.

Being a secret IRS grinch agent in disguise I think your 3% contribution is siply that - a 3% nonelective (no special vesting since it doesn't satisfy safe harbor)

now it could be treated as a QNEC and used in the ADP test, thereby 100% vested, and if the HCEs didn't receive any of it, then it would probably help the test.

[John A]

Tom,

Thanks for the reply. If the notices were given by Dec. 1, then what would the deadline be for doing the amendment? Is there any way that the deadline would be the end of the remedial amendment period?

[Guest]

if you are talking about the non elective, then the amendment really doesn't have to be in place until Dec 1 of the plan year the nonelective will be made.

see IRS Notice 2000-3, Q-1

[KJohnson]

Tom, I thought Q&A 1 gave you to the end of the remedial amendment period so that calendar year plans had until 12/31/01 to amend if they used safe harbor in 1999, 2000 or 2001.

[Guest]

the last paragraph of Q1 reads

A plan sponsor that takes advantage of the flexibility provided under Q&A1 is not required to continue using the 401(k) safe harbor nonelective for the following plan year and is not limited in the number of years that it takes advantage of this flexibility...

[KJohnson]

Assuming a timely notice and a calendar year plan, I guess the question is when do you have to amend the document for a plan that first "goes" safe harbor in 2001. My understanding is that the deadline is 12/31/01 for both the matching and QNEC methods because of the extension of the RAP.

Then, in 2002 an amendment would have to be in place by 12/1/02 for the QNEC method and by 01/01/02 for the match method.

[Guest]

my notes from the ASPA conference (workshop 21 & 27) say

Initial notice: (emphasis mine)

...The notice MUST state plan MAY be amended during the plan year to provide that the employer will make a safe harbor non-elective contribution of at least 3% to the plan for the plan year and that a supplemental notice will be provided to eligible employees 30 days prior to the last day of the plan year informing them if such an amendment is made.

So, for 2001, I posted note DEC 1,2000 saying I may amend

at the latest, on Dec 1,2001 I post (maybe I should say, I inform all eligible ees) that I amended the plan to make the safe harbor 3% nonelective. I also tell the ees I may amend the plan for 2002 to provide a safe harbor nonelective.

that is how I understand things to operate. Match is a different issue. It doesn't really matter whether you defer if I make a nonelective, you will receive it anyway. But match, well, it does make a difference. now, I understand you can amend out of the match during the year providing you give 30 days notice, and then you have to test as well.

by the way, I do not think QNEC is the correct term. i believe it is simply a safe-harbor nonelective contribution.

A SHNEC???

[KJohnson]

I agree with the timing of the notice and also that 2000-3 modified 98-52 section XI.A to provide that the deadline for the amendment for the SHNEC is 12/1.

However, Q&A 1 still appears to acknowledge the effect of 98-52 XIB and give you the leeway to amend the Plan within "the remedial amendment period applicable to plan changes incororating the 401(k) Safe Habor Provisions").

Tom, in your view would this be applicable to the year 2000 as well? In other words, a plan that first used safe harbor in 2000 and sent out the SHNEC "maybe" notice by 5/1/00 would have to amended by 12/1/00 (in addition to sending out the "confirmation notice") and thus would not have benefit of the full remedial amendment period. On the other hand, an employer who used the safe harbor match for 2000 would still have until 12/31/01 to amend?

This would appear to present a problem to prototype and volume submitters who probably did not have approval of SHNEC amendment language by 12/1/00.

[R. Butler]

In regard to the December 1 date of the notice, how strict is the IRS going to enforce that date? Technically Notice 98-52 does not require a December 1 date, but rather a "reasonable period of time before the beginning of the plan year" The Notice goes on to state that the requirement is deemed to be satisfied that requirement if notice is given at least 30 days before start of the plan year.

We always tell our clients December 1, but I've always wondered under circumstances where December 1 isn't feasible. Maybe we takeover a plan late in the year and by the time we get all the files it is December 3, is the plan really out of luck?

[Guest]

fascinating. I am trying hard not to open mouth and insert foot. like most, or I assume like most people, i am trying to feel my way around sahe harbors since they are new creatures. actually, that is not the problems, its this remedial period.

I know you can switch current / prior period as long as you document it, can I 'cop out' on this one?

Sal Tripodi's 'checklist for operational compliance during the Gust remedial period has an item J. safe harbor 401(k) plan. if you don't have it, this is a real scaled back version:

1. did plan operate as safe harbor in any plan year prior to the adoption of conforming amendments.

2. if 1 = yes, then what years

3. which safe harbor was provided

4. was safe harbor provided in another plan.

5. specify plan and what year if 4 = yes

so, based on his checklist, I would say as long as notice was provided, the actual amendment can be done with the GUST stuff.

Maybe the rule is once we get past the Reedial period, then it is a DEC 1 issue.

my brain hurts from all this thinking!

[Guest JimD]

Isn't it reasonable to give notice regarding the 3% contribution by 1/1 since the employee gets the contribution whether they take any action or not? Isn't it reasonable to give the match notice in enough time to allow a participant to defer on the first payroll after 1/1?

Its reasonable to give your notice in the 30-90 day time period so you do not have to convince the IRS that anything different is reasonable.

[Guest]

but what you and I call 'reasonable' might not be the same as the IRS 'reasonable'

The whole idea behind giving notice, in the IRS opinion is as follows.

Plan is safe harbor, plan gets free ride on the ADP test.

Therefore, the employer may be neglect in informing the participant of an opportunity to defer, regardless of the fact the ee will receive 3% anyway. that is what they are trying to prevent- the lack of info to the participant.

In practice, what will happen? I imagine some liberty will be taken, the date for giving notice might be missed the first few years on these 'new' plans until people get used to the idea. and who knows how the IRS will handle such scenarios.

........

reasonable - ask the DOL what is reasonable as far as depositing deferrals!

reasonable - ask certain political parties what is reasonable as far as voting goes!

[Guest Matthew Demet]

This is a very timely issue as I have a client who would like to send out the notice to say they may be safe harbor in 2001 (calendar year plan). In reading IRS notice 2000-4, Q-1, I see no requirement that the first notice, that the plan may be safe harbor, be provided at least 30 days prior to the beginning of the plan year. The 30 day requirement is clear for the second notice.

Notice 2000-3 states several times that the first notice is "before the beginning of the plan year". Previous comments here state 30 days is required. Where does that come from?

[R. Butler]

Matthew,

I agree with you that 30 days notice is not necessarily required. But just FYI the 30 days comes from Notice 98-52. The notice does not say you have to give 30 days notice, but if you do you will be deemed to meet the "reasonable" requirement.

It seems to me that if the IRS wanted December 1 to be a "hard and fast" date they could have put it in unambigiuous terms. Every other date requirement in every Notice reegarding safe harbor plans is a set date.

[KJohnson]

Q&A 1 adopts the notice requirement of Section V.C. of 98-52 but simply changes the content requirement of the notice and adds a supplemental notice requirement. Q&A 1 did not change the timing requirement contained in 98-52 V.C. 2. This still requires the notice be sent at a "reasonable time" before the beginning of the plan year. (with the 30-90 day "deemed satisfaction")

[KJohnson]

To the extent that your Plan is/will be using the LRMs--they specifically incorporate the 30/90 day time period.

[Guest RJF]

What if you have a calendar year 401(k)plan that has the safe harbor language in it for 2000, but does not want to utilize it until the 2001 plan year. Are they obligated to make the 3% non-elective? Can they amend the plan? The notice did say "is considering" making a contribution.