Correcting Safe Harbor Plan

Last year, Plan Sponsor amended their document mid-year to change from a safe harbor non-elective to a safe harbor match.  A new notice was issued and safe harbor matching contributions have been made ever since.  Previously, the plan provided for a discretionary match as well. I understand that this was an impermissible change mid-year re-Notice 2016-16 and needs to be corrected.  However, I am inquiring on thoughts on how to best correct this issue.  I'm also struggling on the match piece as participants likely signed up once changed to the safe harbor match in expectation that they would receive 4%. 

Thank you!

Well, you no longer have a safe  harbor plan for last year.  Amendments are not prohibited, they just may screw up  your safe harbor status, which this one did.  You do not correct it; you simply comply with the rules as they now apply, which is no safe harbor status for last year.

I would think you would be best served by giving every participant the greater of the non-elective 3% or the safe-harbor match, but you still have to pass the ADP/ACP tests for the year.  You would do a -11g amendment by 10/15/18 to bring the folks up the greater of the two items.

I suppose you might also be able to get away with applying the 3% non-elective for the period of time up until the amendment and then the match approach for deferrals after that point.

Of course, I hope the plan is NOT top heavy, since moving from a top-heaving meeting non-elective to a non-top heavy meeting safe harbor match is not necessarily the best design option.

1 hour ago, Larry Starr said:

I suppose you might also be able to get away with applying the 3% non-elective for the period of time up until the amendment and then the match approach for deferrals after that point.

 

This appears, on the surface, to be the operation that is most consistent with the plan's language.  Of course, this deals only with the allocation of Employer Contributions outlined in the written plan. 

Good Luck!

Not top heavy...lucklily.  Thank you both.  This makes sense.  

19 hours ago, ETA Consulting LLC said:

This appears, on the surface, to be the operation that is most consistent with the plan's language.  Of course, this deals only with the allocation of Employer Contributions outlined in the written plan. 

Good Luck!

 

Exactly; why I pointed out the need for the -11g amendment to accomplish the other option I suggested be considered.

Unless a maybe notice was handed out for 2107, under what theory can you get away with not giving the 3% non-elective for all of 2017 without disqualify the plan?

I think you might be in the position of having to give the 3% non-elective for all off 2017, the safe-harbor match for the part of the year that was amended in, and you still might be subject to ADP/ACP testing for the year.

You are allowed to amend plans during the year.  As long as the amendment does not produce an accrued benefit reduction, it is allowed. This amendment doesn't disqualify the plan; it disqualifies the plan's status as a safe harbor (which, remember, is optional).  The notice was superseded by the later amendment (and we have to assume the proper notice and SMM was provided to participants regarding the amendment).

You do not have to give the 3% for all of 2017; you would have to provide it up until the effective date of the amendment.  And yes, you clearly lose safe harbor status and are subject to ADP/ACP testing for the year as well.

Hope that helps clarify.

Thanks Larry. I know  you can amend out a safe harbor match with 30 days advance notice to participants but I was under the impression that if you have a 3% safe harbor written into the document for the year you could only amend it out mid-year if you had a "sever economic hardship." Did that change in published IRS guidance and I missed it?

Lou,  It gets confusing for sure.  Under the regulations, there are two issues: 1) reducing or suspending safe harbor contributions during the year  (the "exiting rules"), or 2) TERMINATING a safe harbor 401(k) plan during the year.  In the first example, the plan is NOT terminated.

Under the “exiting” rules, the plan continues but loses its safe harbor status and must apply ADP/ACP tests using current year testing to remain qualified.

Under the midyear termination rules, plan goes out of existence but it’s still possible to preserve safe harbor status in the year of termination depending on the reason for the termination.

Under the special rules, if termination is for: Substantial business hardship or a 410(b)(6)(C) transaction (e.g., merger, acquisition, etc.). then the plan gets to retain safe harbor status; no 30-day notice mandate and must fund contributions to termination date. This where the suvere economic hardship that you note comes into play.

Our example in the post is the first (exiting but staying in existence). They eliminated the safe harbor non-elective which made the first situation apply. That they then added a match that they THOUGHT was a safe harbor (but wasn't) doesn't change the fact that they have to meet the ADP/ACP tests for the year of the change.

Any better?

Thanks. I guess that was clarified in IRS Notice 2016-16. I'll have to go back and re-read that one.

I thought if you start the year as a safe harbor, then except for certain exceptions in 1.401(k)-3(g) and the Notices (and switching from a matching to nonelective safe harbor does not seem to be one of the exceptions), you couldn't fall back on ADP or ACP. See 1.401(k)-3(e)(1) second sentence. See also Section II,B, second sentence. There are rules in 1.401(k)-3(g) for exiting a safe harbor match if you are under economic stress or your plan year notice contained require verbiage, but here they have apparently amended the plan to change from one type of safe harbor to another.

The way I read the regs, you have a bigger problem than just losing safe harbor status. The second sentence of 1.401(k)-3(e)(1) says "In addition, except as provided in paragraph (g) of this section or in guidance of general applicability published in the Internal Revenue Bulletin (see §601.601(d)(2)(ii)(b) of this chapter), a plan which includes provisions that satisfy the rules of this section will not satisfy the requirements of §1.401(k)- 1(b) if it is amended to change such provisions for that plan year."  

1.401k-1(b) contains the coverage and nondiscrimination rules for 401(k) plans,.  So, I read this as saying an improper mid year amendment to a safe harbor plan disqualifies the plan.

Kevin, C, agree. We're saying same thing and quoting same reg, although you're being more blunt. In short, it's VCP  or audit lottery time.

Me? Blunt?

I recently did an anonymous VCP filing for a client with a similar problem, but a bigger mess.  They had a 3% SH plan with us and without telling us, went to a payroll company who set them up with a new SH match plan mid-year.  Yes, the payroll company knew about the existing plan.  The IRS allowed us to correct by giving participants the greater of the two SH formulas for the year of the attempted change and they were able to keep safe harbor status.  

13 minutes ago, Kevin C said:

The IRS allowed us to correct by giving participants the greater of the two SH formulas for the year of the attempted change and they were able to keep safe harbor status. 

That is the correction I would think would apply. Thanks for confirming.