Mid-year Amendment to a Safe Harbor Plan

Do we all agree that based on IRS Notice 2016-16, I can amend the Plan to exclude certain items of compensation?

I will send out an SMM at least 30 days in advance, but because the definition of comp is not required safe harbor notice content I probably don't even need to do that.

Agreed?

That’s my understanding and think the notice with nothing changing on the notice is belt and suspenders which I like 

I'd express a concern on the item that says

(iii)Reduction or suspension of safe harbor contributions or changes from safe harbor plan status to non-safe harbor plan status (permitted only as described in §§ 1.401(k)-3(g) and 1.401(m)-3(h)).

seems to me if I excluded bonuses (or something similar) I have reduced the safe contribution. e.g. I told the folks they would receive 3% of total comp for the whole year and now I have reduced that amount they will receive

I've always felt at least some explanation of comp. is required safe harbor notice content.  See Treas. Reg. 1.401(k)-3(d)(2)(ii)(D).  I read that to mean you have to describe the definition of compensation.  That doesn't mean you have to quote the regulations, which nobody would read, but you have to explain the types of compensation that can be deferred.  Something like, "the plan allows you to defer out of your weekly paycheck."  

I don;t think that's right, the regs say you can cross-reference the SPD for the definition of comp.  So yes, you have to describe what comp is eligible, just not in the notice itself.

Tom, I agree with you.  But what is surprising is that they didn't just say excluding comp items is the same as a reduction in benefits.  I'm doing it 1/1/19.

Thanks!

Austin,

My point was that the definition of comp. is in fact required safe harbor notice content (whether in the notice itself or by reference to the SPD).  You can't make a mid-year change to the definition of compensation for a safe harbor plan.  

2 minutes ago, ERISAAPPLE said:

My point was that the definition of comp. is in fact required safe harbor notice content (whether in the notice itself or by reference to the SPD).  You can't make a mid-year change to the definition of compensation for a safe harbor plan.

Well that's not true, I am only barred from a reduction in benefits.  I can amend to add compensation.

38 minutes ago, ERISAAPPLE said:

Something like, "the plan allows you to defer out of your weekly paycheck."  

This is just not the same thing as a definition of compensation nor is it materially different from saying "you can make contributions from your Plan Compensation."  Obviously you can;t describe a deferral program without a sentence like that.  That doesn;t mean the definition of comp is required content because it clearly is not.  This of course is only relevant when deciding the timing/need of a new Safe HArbor Notice, and how quickly this enhancement can be effective. 

just to be clear, the IRS website has the following requirements for safe harbor notice (I only copied up to the highlighted item.

https://www.irs.gov/retirement-plans/notice-requirement-for-a-safe-harbor-401k-or-401m-plan

Required content

The notice must be sufficiently accurate and comprehensive to apprise an employee of his or her rights and obligations under the plan.

For both a traditional safe harbor notice and a QACA safe harbor notice, the notice must contain the following information:

• The safe harbor matching or nonelective contribution formula used in the plan,
   
• Any other contributions under the plan, or matching contributions to another plan on account of contributions under the plan, including the potential for discretionary matching contributions, and the conditions under which the contributions are made,
   
• The plan to which safe harbor contributions will be made if different from the 401(k) plan,
   
• The type and amount of compensation that may be deferred,
   
• How to make deferral elections, including any administrative requirements that apply to the elections,
   
• The periods available under the plan for making elections,
   
• The withdrawal and vesting provisions applicable to contributions under the plan, and
   
• Information that makes it easy to obtain additional information about the plan (including an additional copy of the summary plan description (SPD)), such as telephone numbers, e-mail addresses and mailing addresses of individuals or offices from whom employees can obtain such plan information.

A safe harbor notice may cross reference the plan's SPD for information regarding any other contributions under the plan (including the potential for a discretionary matching contribution) and the conditions under which such contributions are made, the plan to which the safe harbor contributions are made, if different from the 401(k) plan, and the type and amount of compensation that may be deferred.

.................

so I guess you don't have to include comp in the notice, so I save my self the trouble of issuing a new notice, but now I have to issue a new SPD anyway. not sure that saves me anything in the long run!

You avoid the 30 day advance notice requirement (and you only need to deliver an SMM, not a full SPD).

The big dogs are weighing in now....this is where I slowly back out of the room (forum). 

Austin -

I have a problem with that.

1.401(k)-3(d)(3)(I) last sentence says   The determination of whether a notice satisfies the timing requirement of this paragraph is based on all relevant facts and circumstances.

As opposed to other changes that might be made, I'd say if I changed the definition of comp (especially if it effects a matching contribution) that you fail the concept of allowing a person to make an informed decision whether to change deferrals if you get to wait 210 days or so to issue the SMM!

but then Dr. Evil might be trying to influence me.

Austin - I'm not clear on how you avoid the 30 day advance notice? It is still "required content" in the SH notice, albeit via a reference to the SPD.

OK, Tom beat me to it.

Austin,

Participants know what their paycheck is.  They don't necessarily know what Plan compensation means.  If the plan defines compensation to mean the amount received in a pay check (such as "weekly base salary" or something like that), I see no problem with describing the type of compensation deferred as "your weekly paycheck."  It doesn't matter whether that description is in the SPD or the safe harbor notice.  The fact that it can be in the SPD is a red herring.  

Both the regulations and the notice clearly say that the required contents of the safe harbor notice (whether in the notice or the SPD) must remain in effect for the entire plan year.  

I honestly don't understand how excluding compensation would increase benefits.  I thought you were talking about amending the definition of compensation to exclude certain items.  

I think I see where you are going with this under the Notice, but I think it is risky.  If the amendment will in fact reduce the safe harbor contribution, I think there is a good risk that the IRS could say it violates Section B(iii) of Notice 2016-6.  I don't think that provision is violated only by amending the formula, e.g., from a 4% QNEC to a 3% QNEC.

Finally, if you are amending 01/01/19, if this is a calendar year plan, I'm not sure why this is an issue.  

As a recap of where this thing started and ended:

1) I initially wnated to amend to EXCLUDE compensation items.  Tom made a great point that excluding compensation items is a not-so-thinly-veiled method of reducing the safe harbor contribution.  Thus, I am now planning on making the change effective 1/1/19.

2) You indicated that I could not make any change to the definition of compensation during the year which I indicated was not correct. For example, if a plan currently excludes bonus compensation or overtime I can amend the plan during the year to include those items of compensation because adding compensation would be the opposite of a reduction in benefits.  I suppose there should be a caveat hear about doing this in the final 3 months of a safe harbor match plan, but I'll ignore that for now (reference the listing of prohibited changes for what I mean).

3) But now when I amend the plan today to exclude bonus from the definition of compensation (which I can do) the question is a) when can it be effective, and b) do I need to redistribute the safe harbor notice? 

In my opinion the answer is that it can be effective the very next pay-date and no new safe harbor notice is required (an SMM of course is required).  Why?  I only need to issue the new notice and provide 30 days advance notice for a change to required content in the safe harbor notice. 

Call me crazy but it seems we all agree that the definition of compensation is not required content.  I think your position is that because the SH Notice requires you to cross-reference Compensation in the SPD that this makes the definition of compensation required content.  I think that is the issue, and I simply disagree.  The required content is the reference to the SPD.  The obvious point of redistributing the notice is that you would have different wording in the notice.  In my scenario, there is no change in the language of the notice (and thus it need not be redistributed).

If there is something else behind our different conclusions do let me know!

the irs says you can reference the comp in the SPD so no argument there.

however if you start excluding comp I think that since that reduces the contribution someone will receive, then the 30 days notice is  required, and that would not be satisfied by waiting to issue an SMM.

the regs are clear the 30 day rule  is based on facts and circumstances.

so you have normally

30 day before start of plan you issue notice. this can reference the SPD in regards to comp. so someone can make an informed decision because he has access to the current spd. he knows the rules.

but now mid year you change the definition of comp. how can he make an informed decision if he isn't going to know for 7 months that comp definition was changed? that is the point the facts and circumstances kicks in, at least in my opinion. at the start of the year, the comp definition is already known in reference to the spd, but mow it is not.

I missed the part about you sending out the SMM timely.  Yes, you can send out the SMM timely in lieu of sending out a revised safe harbor notice timely, given that the notice never mentioned compensation in the first place.  I would mention in the SMM that it effectively changes the safe harbor contribution amount.  

This shows we should not rely on this board for our answers.  I was responding only half reading the original question.  I was answering a call from a client, a colleague came in who wanted to discuss Grand Theft Auto, I was trying read e-mails, and trying to read a plan document all at the same time.  

24 minutes ago, austin3515 said:

Call me crazy but it seems we all agree that the definition of compensation is not required content.  I think your position is that because the SH Notice requires you to cross-reference Compensation in the SPD that this makes the definition of compensation required content.  I think that is the issue, and I simply disagree.  The required content is the reference to the SPD.  The obvious point of redistributing the notice is that you would have different wording in the notice.  In my scenario, there is no change in the language of the notice (and thus it need not be redistributed).

4 minutes ago, Tom Poje said:

this can reference the SPD in regards to comp. so someone can make an informed decision because he has access to the current spd. he knows the rules.

but now mid year you change the definition of comp. how can he make an informed decision if he isn't going to know for 7 months that comp definition was changed? that is the point the facts and circumstances kicks in, at least in my opinion. at the start of the year, the comp definition is already known in reference to the spd, but mow it is not.

I can't put my finger on the exact Q&A, but it was the last or second to last ASPPA Annual Conference where the IRS participated with a panel discussion (but not written answers).  A similar question was asked and the opinion was that if you made a change that was not required SHN content because of a cross-reference to the SPD, a new SPD or SMM must be issued to the participant immediately. To my recollection, the did not discuss whether the 30-day advance notice rule would kick in but I think Austin is correct that because a new SHN is not required, the 30-day advance notice is not required either.  It would follow that you could implement the change immediately after distributing the new SPD or SMM.

Of course, this was only the opinion of that IRS employee and not that of the IRS and cannot be relied upon yada yada yada 

13 minutes ago, Tom Poje said:

however if you start excluding comp I think that since that reduces the contribution someone will receive, then the 30 days notice is  required, and that would not be satisfied by waiting to issue an SMM.

Now your confusing me!  For additional exclusions you had me convinced that I had to wait until 1/1?

Do you think I need to wait 30 days to make the definition of comp MORE generous?  I didn't think so.  I can;t tell what you think because you seem to be referring to excluding comp.

1 hour ago, austin3515 said:

But now when I amend the plan today to exclude bonus from the definition of compensation (which I can do) the question is a) when can it be effective, and b) do I need to redistribute the safe harbor notice? 

In my opinion the answer is that it can be effective the very next pay-date and no new safe harbor notice is required (an SMM of course is required).  Why?  I only need to issue the new notice and provide 30 days advance notice for a change to required content in the safe harbor notice

you are the one that confused me because you said you could exclude bonus effective the next pay date. but maybe I read that wrong.

the regs have always said you could reduce or eliminate, you had to give 30 days notice and you took the plan out of safe harbor.

but lets look at the issue going forward.

I eliminate bonus effective 1/1/2019. if I amended today then 7 months for the smm would be 11/1 or thereabouts. the safe harbor notice is issued 12/1, it references the smm so no problem with the comp definition.

suppose instead I don't amend until 7/1/18 effective 1/1/19. smm will be issued 2/1/18

on 12/1 I give my safe harbor notice. it references the SPD which says total comp is used because the new smm isn't available yet. well, that is plainly incorrect, and therein lies my problem. the participant can not make an informed decision at that poit in time.

56 minutes ago, Tom Poje said:

you are the one that confused me because you said you could exclude bonus effective the next pay date. but maybe I read that wrong.

That was my initial ignorant assumption - your persuasive argument convinced me I was wrong :)

at least in my system of belief someday once did the same for me.

have a blessed Easter to all.

7 hours ago, austin3515 said:

3) But now when I amend the plan today to exclude bonus from the definition of compensation (which I can do) the question is a) when can it be effective, and b) do I need to redistribute the safe harbor notice? 

Aha!  I see why I screwed everyone up so much!  I should have said "when I amend the plan today to INCLUDE bonus"

Sorry everyone!!