Refusal to make Safe Harbor Match

Plan was setup as a Safe Harbor Match. Unknown if notices were handed out to the employees or not but the client was advised it needed to be done and were supplied. Now the Trustee refuses to make the actual Safe Harbor Match. There are employees that defer and the plan fails discrimination testing. First year filing, besides informing the client we will no longer handle their plan since they won't follow the rules are there any other options? Chances are since they never filed they will continue to operate this way and the chances of being discovered are probably fairly low. Do we just cut them loose and hope that it is discovered one day?

Of course documenting everything thoroughly to protect myself.

Unless you think you can make more $ off them for the VCP application, of course.....🙂

Was the filing put on extension?  If yes, then there is a reasonable chance they will get an IRS notice within the next year following up on it.

Has the client already filed their tax return?  If yes, I suspect they took no deduction for a SHM.  If they did, then they have a tax return issue on top of everything else. 

If you have access to their tax preparer or financial, you may want to explain the issue and see if they will help convince the client to fund the plan.  Sometimes, a client will listen to their tax preparer or financial adviser it those relationships are long-standing.  This is going above and beyond trying to keep a client out of trouble, but sometimes if a client finally listens, they come to understand the value you bring to keeping them out of trouble.

If the client adamantly refuses, you can try sending them letter that explains (not in great detail) the consequences of not funding the SHM, and mentioning to name a few:

• that the plan can be disqualified and everybody gets taxed along with paying penalties and interest;
• that the plan fiduciaries are personally accountable and liable for operating the plan according to its terms;
• that not filing or filing with false information under penalties of perjury carries separate penalties from the IRS and DOL that can quickly add up to amounts exceeding $100,000 each; and,
• that the cost of meeting their obligations now is far less than trying to clean up things later.

You should consider taking a look at your service agreement for clauses dealing with termination of services and for clauses dealing with the client not fulfilling their obligations under the agreement and under the plan document.

It is clients like this that make me think how much more fun this business would be without clients like this.  Good luck!

16 minutes ago, Paul I said:

It is clients like this that make me think how much more fun this business would be without clients like this.

😁

Yes, it is a constant mystery to me why some clients PAY us (not nearly enough, of course) to do admin, then refuse to do what we tell them to do!

Assuming this is calendar year and you are talking about 2022. Other than document everything and resign I'm not sure what there is to do.

If 5500 filed on accrued basis you would presumably file with a receivable matching contribution.

Is the Plan Top-Heavy if not safe harbor?

They do have 12 months to deposit the safe harbor so technically they have until 12/31 to make the deposit. Though the deadline for deduction for 2022 could be 3/15, 4/15, 9/15, 10/15 depending on entity type and extension status. Though deadline to include in 415 limit for 2022 is 30 days after deduction deadline.

Remind them about plan disqualification issues, excise taxes, and that what it takes to discontinue a SH which they probably still are for 2023, let them know about IRS correct programs and the name of an ERISA attorney they can call.

I fully agree with what Paul I. said, with the following amplifications: (1) likelihood of discovery should never inform the course on which way to act; and (2) in addition to what Paul I mentioned, since the 5500 is signed under penalty of perjury, there is also the likelihood of criminal liability on the part of the client and its principals.

If the 5500 is done on a cash basis, is there perjury?

Beyond the cautions others mention, consider whether a provision of an IRS-preapproved document or of a Revenue Procedure under which the document sponsor and others offer uses of the document requires the document sponsor or its licensee or sublicensee to notify a user that the user seems to operate the user’s plan other than according to the user plan’s governing documents.