Problem amending a Safe Harbor Plan

For many years, Client has sponsored a volume submitter SH plan with an Enhanced Match and discretionary integrated PS formula.  The SH notice was timely prepared and distributed for 2017 by December 1, 2016. Client became unhappy with TPA, fired them for 2017, and hired its Payroll service provider to do admin, effective December 29, 2017.

Payroll Service restated the Plan and changed it to a 3% SH Nonelective formula and changed the PS formula as well, and claims it's for the 2017 plan year.  Client didn't notice the changes in the two formulas until just now., but obviously discontinuing the SH match without Notice and amending the Plan mid year 2017 are clearly unacceptable.

Question is what to do next?  Does the former, volume submitter Safe Harbor match plan with the integrated formula control for 2017, or could there be a viable argument to use the 3% Nonelective plan with the comp to comp PS allocation formula?

I think you are stuck with both. 

I'm not sure what is going on.

when did the payroll service provider prepare the document?  (you indicated they weren't hired until late 2017)

If the document wasn't completed before 1/1/2017, my understanding is you can't switch safe harbors retroactively, one of the rules being the formula has to be in place before the start of the year. The one exception being the 'maybe we will be 3% safe harbor' situation.

[As a general rule, the safe harbor provision to a plan must be adopted before the first day of the plan year and remain in effect for the entire 12-month plan year. [Treas. Reg. § 1.401(k)-3(e)]]

if the document was amended properly before the start of the year, I don't see how you are stuck with 2 safe harbors, as you generally have to follow the terms of the document. you would have a situation in which you have a bad safe harbor notice.

at the 2007 ASPPA Conference one question pertained to issuing a bad notice:

Q19) Safe Harbor 401(k): A notice is issued indicating a safe harbor contribution will be made for the upcoming year, but the plan was never amended to contain safe harbor language. Now that it is after plan year end, it is too late to amend to correct the problem. Is the plan on the hook for the contribution, and must also run all appropriate tests?

A: Notwithstanding the notice provided, the plan terms do not provide for the safe harbor plan. Therefore, you should follow the plan terms and run the ADP test as needed. (Whether there is a Title I issue due to the notice is in the purview of the DOL.)

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

hopefully (at least it sounds like it) for 2017 the plan was amended too late to switch to 3% and therefore the match would be required (as per terms of the document) and that would align with the notice given for 2017.

Tom, the new, prototype document was written in December of 2017. The original volume submitter document has been in effect for many years prior to 2017.  There was both a 2017 SH Notice and a 2018 SH Notice; both of which say the SH is the Enhanced Match; it is not a "maybe" SH Notice.

I don't see how the payroll provider document could be in effect for 2017 due to the requirement of not amending a SH Plan mid year.

Mike P, when you say I'm stuck with both, what do you mean? Both what?

3 hours ago, Barbara said:

Tom, the new, prototype document was written in December of 2017. The original volume submitter document has been in effect for many years prior to 2017.  There was both a 2017 SH Notice and a 2018 SH Notice; both of which say the SH is the Enhanced Match; it is not a "maybe" SH Notice.

I don't see how the payroll provider document could be in effect for 2017 due to the requirement of not amending a SH Plan mid year.

Mike P, when you say I'm stuck with both, what do you mean? Both what?

 

 

I wasn't sure either what Mike meant, until I parsed what happened.

You can CERTAINLY amend a safe harbor plan in December of 2017 to change the safe harbor contribution for 2017.  The problem is that you have just blown up the safe harbor status for 2017.  And there is the question of what happens to the enhanced match for any time prior to the amendment (I would vote you cannot change it and argue that 411(d)(6) rights have attached). But now, you have added a 3% contribution for 2017 as well, and I think you are stuck with that as well (since we are now in 2018 and you can't take that away either).  Therefore, you are stuck with BOTH!  AND a plan that has to be tested on an ADP basis and that has an incorrect safe harbor notice for 2018 (another issue to be dealt with).

And, you have a lawsuit against ADP or Paychecks.

And you have a great story to tell all your clients why you never have payroll firm to plan admin and why you  never have the butcher at Whole Foods do brain surgery!

while you can amend a safe harbor to reduce / eliminate a safe harbor and thus require safe harbor testing. if this was done in Dec, that requires 30 days notice 1.401(k)-3(g)(ii), so for 2017 I still think you have a safe harbor match through the end of 2017 just because of the timing issue.

since a safe harbor has to be in effect for 12 months (and you can not tack it onto an existing 401(k) I still don't see how the 3% can be effective for 2017 as well. you simply can't do that, at least as far as I understand the rules. (For the sake of the argument, let's say the original plan was simply a 401k, mot safe harbor match. there is no way I can amend in 2017 and make it a safe harbor for 2017 (and therefore cheat and pass testing, and avoid top heavy, etc)

or perhaps put another way, I think you have an unenforceable document at least for 2017.

how it all gets unwound before the eyes of the DOL and IRS is another matter. 

There might be an argument that you can't add the SHNE at that point in 2017 and it is therefore null for 2017.  I'm not sure I want to be the one making the argument though.

Barbara, are you with the original TPA, or taking over from the p/r company now, or...?  Might help to know the players.  Has someone confronted the p/r company with this malpractice?  I'd be looking to push blame and costs for fixing on them.

Some interesting ideas here. Some make it sound like you can ignore adopted plan language under the argument that the adoption of those provisions were done in a way that did not fully satisfy the law or regulations.

Have any of you had success arguing to an IRS agent, upon audit, that the plan sponsor can ignore the benefits promised by an amendment they adopted because the amendment without the proper timing or without the proper notices? If not, have you had success with that argument under a VCP application?

well, lets suppose instead of safe harbor, you had a comp to comp profit sharing

no hours requirement.

Company amends plan mid year to allocate by groups.

I simply can't do that - despite having a new document that says I have a new formula. the fact the HCEs say I have to follow the new plan document can't work, that would be a cut back on what was accrued.

in a safe harbor

you can't change the formula retroactively, you can going forward, but with 30 -90 days notice. which of course takes it out of safe harbor for that year.

so amending the plan to 3% shnec (and eliminating the SHMAC) retroactively effective 1/1/2017 is simply impossible. at least I don't see anything in the regs that says I can do that.

it could have been amended going forward, but even at that with at least 30 days notice. in this case it was Dec, so even 30 days notice would put the plan into 2018.

others have argued in other posts on other topics they have had success arguing Scrivener's errors under VCP, and so that may be applicable here. who knows.

In your example, 411 protects the allocation rights, but amending to put each person in their own rate group is still not a problem as long as the resulting allocation allocates comp to comp for that year. No cutback.

But we're not talking about a discretionary profit sharing issue here. If the plan has promised, under its terms, to provide a safe harbor match, then somehow also adopts an amendment that promises a 3% nonelective for the same year, are you saying that 411 does not apply to protect the 3% for those participants?

I agree that under VCP anything might be possible if you have good facts and circumstances to present.

I also agree that the 3% promise is not a correctly implemented safe harbor provision as described, it has all kinds of problems there. But upon audit by the IRS, I hold little hope for success that we can just tell the IRS agent to just ignore that amendment, that the employer has zero obligation to fund that.

Are there really any IRS agents that would allow such language to be ignored?

who knows.

going back to my example, instead of groups, what if I amended to put in hours requirement or last day rule or excluded hourly. I simply can't do that at a late date.

or if it was a db plan, I amended from 2% accrual to 3% contribution cash balance for NHCEs and 50% for HCEs. at Dec 1 it is something you simply aren't permitted.

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

but again, with a safe harbor, at 12/1, the best I can do is amend with an effective date of 1/1 the following year.

as the Q and A indicated, you might have a Title 1 issue with the DOL. But even in this particular example, a notice was never provided so no one expected a 3%, all were under the impression of the match safe harbor.

but again, who knows how the DOL/IRS would handle such a blatant idiotic (for lack of better term) situation that has arisen.

Okay. The difference being that 411 prevents you from cutting back, and likely the plan document has some buried language in there that provides for the prevention of such a cutback. 411 does not prevent you from adding extra benefits.

I personally (but then what do I know)  think it is more of simply being something you can't do. I can't put in a plan today for 2017. sure I can produce a document but....and even though in this case the action took place late in 2017, I'd hold it is the same concept. it is simply impossible to change a safe harbor that late in the year.

3 hours ago, John Feldt ERPA CPC QPA said:

I also agree that the 3% promise is not a correctly implemented safe harbor provision as described, it has all kinds of problems there. But upon audit by the IRS, I hold little hope for success that we can just tell the IRS agent to just ignore that amendment, that the employer has zero obligation to fund that.

Are there really any IRS agents that would allow such language to be ignored?

Good point and I think it would probably come down to the language. Our document doesn't permit you to make both a 3% SHNEC and a SH match. Choosing one option would "blank out" the other in the adoption agreement in the same section -- by comparison to the prior document, the amendment doesn't just say "add 3% NEC to satisfy ADP/ACP safe harbor", it says "add 3% NEC and remove the match". Since the removal of the match mid-year would be a problem, the amendment has a problem and I don't think you'd have to struggle to convince the IRS of that.

But you're right, I could definitely see a situation where the document is set up differently and your amendment could essentially amount to "Effective X/X/XX, a QNEC contribution will be made annually to satisfy the ADP/ACP safe harbor..." and then it's a lot tougher to argue you're not on the hook for both.

I thought even payroll providers knew better than to retroactively try to change the type of SH...

I think Mike and Larry are correct.  You are stuck with the match because you have led the participants to believe the have to contribute to get a contribution.  you also have to follow the document and provide a 3% contribution, even if it blows up your safe harbor.   

31 minutes ago, duckthing said:

Our document doesn't permit you to make both a 3% SHNEC and a SH match. Choosing one option would "blank out" the other in the adoption agreement in the same section -- by comparison to the prior document, the amendment doesn't just say "add 3% NEC to satisfy ADP/ACP safe harbor", it says "add 3% NEC and remove the match". Since the removal of the match mid-year would be a problem, the amendment has a problem and I don't think you'd have to struggle to convince the IRS of that.

Your document doesn't allow ADP/ACP combos at all?  I could understand that it wouldn't allow both as the ADP safe harbor, but I have never seen a document that doesn't allow for a match in addition to the 3%

35 minutes ago, duckthing said:

Since the removal of the match mid-year would be a problem, the amendment has a problem and I don't think you'd have to struggle to convince the IRS of that.

For document purposes, there is no problem with a mid year amendment.  For safe harbor purposes, you have messed up royally.  

Here are answers to a few of the questions posed:

1.  I'm a consultant hired to fix the problem, so I'm neither the former TPA nor affiliated with the Payroll Company.

2.  Both the 2017 and 2018 SH Notices specify a SH Match, so that is/was arguably the client's intent. Client indicates he had no idea payroll company was required to restate the Plan (to take it out of Volume Submitter status), and was sent signature pages only, not the adoption agreement, until we just requested that now.

3.  The Adoption Agreement issued by the payroll company that was supposedly effective 12-27-17 allows for a discretionary match plus a SH NEC, but not for both a SH NEC and a SH Match.

4.  Payroll Company advanced the funds for the SH Nonelective and allocated these to Participant accounts sometime this March.

Here are the questions:

1. Can the funds that were allocated in March be removed from Participant accounts without filing under VCP, so that the SH Match amounts can then be properly allocated?

2. If the answer to #1 is no, does anyone think we can use SVP?

3.  Is there any other correction method possible?

On 5/4/2018 at 2:11 PM, RatherBeGolfing said:

I thought even payroll providers knew better than to retroactively try to change the type of SH...

I think Mike and Larry are correct.  You are stuck with the match because you have led the participants to believe the have to contribute to get a contribution.  you also have to follow the document and provide a 3% contribution, even if it blows up your safe harbor.   

Your document doesn't allow ADP/ACP combos at all?  I could understand that it wouldn't allow both as the ADP safe harbor, but I have never seen a document that doesn't allow for a match in addition to the 3%

Sorry, should have been clearer. It definitely allows both, but (as you said) not in the same section. Agreed on your follow-up comment as well.