Late Safe Harbor Notices

[Alf]

I also posted this on the correction board, but I wanted to hear if any 401(k) experts had an opinion.

Several of our accounts that are going to elect safe harbor status did not provide the required notice within the 30 day period prior to the first day of the plan year as required by the IRS. Can they correct this under APRSC by providing the notice now as long as the employees all get to make the maximum amount of deferrals and receive the maximum employer contributions that they would have had the defect not occurred? If we say that it is an operational defect, APRSC has to be available, doesn't it?

Another employer was safe harbor last year and wants to continue but they didn't send out the annual notice within the 30 day period either. Can this be corrected? If not, is the result that they have to ADP/ACP test or does the fact that their plan document says that they are safe harbor mean that they have bigger problems that have to be corrected under one of the IRS correction systems?

[Guest SeanT]

Although the addition of a safe harbor match would benefit the non-highly compensated folks (assuming that the current match formula is not more substantial that the safe harbor formula), I would not feel comfortable addressing the lack of a REQUIRED notice through self correction.

I would probably amend the plan to account for the match formula increase and state that the intent of the plan is to satisfy ADP/ACP as a result. I would then submit the change and timing problem to the service, provided you could make certain that each NHCE is entitled to defer up to plan/code limits and receive the full safe harbor match.

If the service shoots you down, you will be ready for next year.

[Richard Anderson]

I don't think that failure to provide the notice timely is a disqualifying defect, therefore it would not be eligible for correction under EPCRS. The consequence of not providing the notice timely is that the plan must pass the non-discrimination tests, without relying on the safe harbor protection. If the consequence of not providing the notice timely was disqualification, then correction would be available under EPCRS.

[Guest PJW]

If the consequence for failing to provide a notice is satisfaction of the nondiscrimination testing, which testing method is to be used...current or prior? I believe it would be current, but I can't find anything in 2000-3 or 98-52 that confirms this.

[Blinky the 3-eyed Fish]

PJW, if the notice was not provided and the plan had to pass nondiscrimination testing for the deferrals and match, it would become like any other non-safe harbor 401(k) plan for testing purposes. There would be no special requirement to use one testing method or another simply because the notice was not given.

[Tom Poje]

Blinky:

My understanding if the plan was safe harbor, then technically you are on current year method. lets suppose plan was safe harbor in 2000. current method because of safe harbor. in 2001, notice was not given timely. I don't see how you can 'switch' back to using the prior year method - unless you haven't restated your document yet and listed what methods were previously used.

[Blinky the 3-eyed Fish]

Tom, I agree with you. But that would be the case with any 401(k) plan, not just safe harbor 401(k) plan regarding the document wording.

[R. Butler]

Did they not give notice at all or just fail to give within 30 days? If they gave notice, but just less than 30 days prior to the start of the plan year, can you make an arguement that the date actually provided was reasonable under the circumstances? The IRS does not specifically require that the Notice be given 30 days prior to the start of the year, the IRS merely sets forth that Notice will be deemed timely if given 30 days prior.

If Notice not given on a timely basis, the Plan is not a safe harbor plan for that year. The Plan would be treated in the same manner as a traditional 401(k). I agree with T. Poje as to the testing method. Notice 98-52 provides that if a Plan meets Safe Harbor, the Plan is deemed to have used the current year method for that year.

[jaemmons]

I believe I may be getting a little "anal retentive" but I see an operational defect here. Under Rev Proc 2002-47, Part III Section 5.01(1)(B)..."A failure to follow the terms of the plan providing for the satisfaction of the requirements of 401(k) and 401(m) is considered an Operational Failure..." If the plan had been amended to add the safe harbor language, contributed the SH contributions but failed to satisfy the Notice requirements of IRS 401(k)(12)(D), then it has failed to satisfy the requirements of 401(k) to meet "safe harbor" status. I am assuming that the plan document makes reference to these contributions satisfying the requirements of 401(k)(12) and/or 401(m)(11).

Since 100% of the eligible NHCE's were affected by the lack in providing the notice, you have a significant operational failure which can be corrected under this Rev Proc (See Part IV Section 9.01). I would suggest making a note to the file, supply the participants with the proper notices and if any decide that they would have increased their deferral rates, then the ER must make up the difference on both the deferral and corresponding match.

In addition, the ER should be provided with some guidance on when these notices must go out and and maintain administrative procedures to make sure it doesn't happen again.

There really isn't any written guidance on failure to provide these notices (unless I am missing something) so if the employer wishes to maintain the plans safe harbor 401(k) status, I would suggest giving the notices now and figuring out what if any additional contributions need to be made. You cannot just test the plan as if it were a normal 401(k) because the plan document contains language (as I previously assumed) that the employer contributions will be made in satisfacation of the requirements in 401(k)(12) and/or 401(m)(11).

[actuarysmith]

My first reaction was similiar in nature to the last reply. However, with a slightly different twist to it-

If you allow the safe harbor plan to "go forward" in light of the late notice on the basis that you are still allowing for participants to make the max deferral on full year comp, and get the employer match........

Who will actually do this? Predominately it will tend to favor HCE's. Many NCE's will not be able to "adjust their deferral % upward" to make up for the lost time. They simply can't afford it. this might be deemed to be discriminitory in terms of the BARF rules. (Benefits Availability Rights Features - Clients love learning that Acronym!)

Is not providing a notice a form defect or an operational defect? It is not strictly a plan document, but it IS part of the plan's documenation.

If it is a form defect, then you would not be able to use a self-correction technique. If it is an operational failure, an approach like that last post might work.

[Guest PJW]

Thank you for your input, this is exactly what I was looking for. Plan disqualification didn't even cross my mind.

[Guest timeout]

Not to be skipping over threads here, but I concur that for existing k programs, if one does not timely provide the safe harbor match notice (e.g. participants do not have the abilitility to 'take advantage of' the propsective fully vested no aob safe harbor match), the year end (k)/(m) complies using current year testing.

[Tom Poje]

The ERISA Outline Book says the following in regards to

failing to give timely notice:

"The notice is a condition to relying on the ADP safe harbor. Thus, if notice is not given on a timely basis for a plan year, the plan is NOT a safe harbor 401(k) plan, EVEN IF the safe harbor contribution is provided for that plan year"

....it is anticipated the IRS would excuse de minimis failures, such as failure to give notice to a small percentage of employees, as long as notice was given ... as soon as [possible] after the error was discivered...

The IRS has informally indicated it MAY permit correction of the untimely notice through...APRSC and VCR program...

(page 11.339 of the 2001 edition, emphasis (Capital letters) is mine.

I would hold that if the safe harbor was the 3% Nonelective you would have an easier time pleading your case, than if the safe harbor was a Match.

The nonelective has no real bearing on whether one defers. Plus, the notice only has to say the nonelective might be provided.

But that is my opinion!

[jaemmons]

I believe the notice dilemma brings to light an important issue. In reality, if a client's intentions were to establish a safe harbored plan and they amended the document, held enrollment meetings to that effect, started making the matching contributions but just did not give the notice at the PRESCRIBED time, you in the least have an operation defect (since the plan is NOT being operated the way it was written). In my opinion I don't feel the IRS would just look upon the plan as not being safe harbored for the year, if the sponsor just gave out the notice now and was willing to make any participant whole, with respective earnings, who would have deferred the maximum to get the full sh match.

It is our responsibility to our clients to ensure that the plan design they wish to implement is done so within IRS prescriped compliance measures. It appalls me as a consultant to hear others just go to a black and white answer based upon unwritten guidance when we have been given numerous corrective measures by the IRS to correct plan "defects." Based upon my interpretation, this IS an operational defect if the plan makes reference to satisfaction of IRC 401(k)(12) and/or 401(m) and since the Notice requirement is needed to meet these requirements, any lack of compliance on the employer's part to give such required notice would be violating plan terms and may be self corrected.

I apologize if this comes off strong, but my firm has taken over quite a few 401(k) plans from a local recordkeeper who was content in telling these employers just what some of my fellow practitioners in this message thread have said without offerring a solution to correct it, and given the fact that there isn't any written guidance on this issue, I for one have no problem with just giving the notice out now and having the employer deposit any necessary "make up" $'s.

[actuarysmith]

Jaemmons-

When you say "just give out the notice and make up the $" - I like Tom's suggestion, I think that going with the 3% non-elective looks a lot less likely to cause trouble.

It is totally non-discriminatory.

With all that said however, in our firm we just tell them that since they missed the timely notice requirement, they will have to wait until the following year to become safe harbor.

By the way, sometimes you can soften the blow by letting them know that while they are not technically a safe harbor, a 3% QNEC might solve most of their testing problems anyway. It has the look of being "safe harbor like" without actually taking a chance of violating the rules.