Changing Safe Harbor Match Formula Mid-Year?

[Guest Gibson]

Calendar year safe harbor 401(k) Plan currently matches, on a payroll period basis, 100% of the first 3% of pay deferred (automatically invested in employer stock), and 50% of the next 3% of pay deferred (to be self-directed by the participant). Plan sponsor satisfied the notice requirement prior to the start of the year. Now, plan sponsor wants to increase the second-tier match to 100% of the next 3% deferred, and will give employees at least 30 days written notice in accordance with the safe harbor guidance (so that they can adjust deferral elections if appropriate). I can't see anything wrong with this. Does anyone see a problem?

[Alf]

Wouldn't this cause the initial notice to have failed the content requirement because it didn't accurately describe the contributions that,as it turns out, were available under the plan for the year. I worry about your proposal because the only guidance we have on changing the contribution formula in a safe harbor plan is if you use the two notice approach.

[Guest Gibson]

I agree that an argument can be made that it causes the initial notice to violate the content requirement. However, 2000-3 does allow the sponsor to suspend the safe harbor during the year, provided proper notice is given, so why should the IRS care if the sponsor amends the formula in a more generous manner? The amendment will not favor HCEs.

[Richard Anderson]

Although, 2000-3 does allow the sponsor to suspend the safe harbor match during the year, provided proper notice is given, you don't get to rely on the safe harbor for any part of the plan year and must do ADP/ACP testing. If you want to argue this situation is similar (I don't think it is), then the safe harbor won't apply for the plan year.

I agree with Alf. Also, I don't think the IRS will be concerned with trying to analyze the motive behind the change (employer wants to be more generous), they simply will apply the rules to the situation. Without guidance on this specific situation, I would be cautious.

Why not add a discretionary match instead?

[Guest Jeff V]

If they add a discretionary match, don't they have to run the ACP test?

[Richard Anderson]

If other matching contributions (other than safe harbor) are made, then the ACP safe harbor is met if:

1. matching contributions are not made with respect to deferrals in excess of 6% of comp.

2. the rate of match does not increase as the rate of deferral increases.

3. discretionary matching contributions may not exceed 4% of comp.

If the above conditions are met and the plan provides one of the safe harbor contributions, then the ACP safe harbor is met, and no testing is required.