Posted by Stacey Snyder
As previously discussed in K.I.S.S.: Keep it Simple and Straight Forward with Safe Harbor Plan Designs, the IRS requires that safe harbor 401(k) plans, prior to the beginning of each plan year, provide eligible employees with a notice that discloses all relevant details of the safe harbor match or nonelective contribution (the “Safe Harbor Notice” or the “Notice”). The purpose of this notice is to inform the employees of the matching or nonelective contribution.
The safe harbor notice must be provided to eligible employees no later than 30 days prior to the start of the plan year, but no more than 90 days. For plans with a plan year starting January 1, the deadline for providing the notice is quickly approaching – December 1. The safe harbor notice must also be issued to each newly eligible participant throughout the year.
The safe harbor notice must include the following descriptions:
- The plan(s) included in the safe harbor provision
- The formula used to compute the safe harbor match or safe harbor nonelective contribution
- Any other possible contributions that may be provided
- The eligible compensation on which the contributions are based
- The method for participants to make elections
- The applicable withdrawal and vesting provisions
The notice must be written out and provided to all participants free of charge as either a hard copy or electronic copy. The notice must be easily accessible and understandable by the participant. If the notice is distributed electronically, the plan is required to provide a hard copy if requested by participants.
If a written safe harbor notice is not provided to eligible participants, but instead, participants are informed verbally, the plan has not complied with the notice requirement. If the plan, for any reason, does not provide the participants with the safe harbor notice, corrective contributions by the plan sponsor are required if the participants’ decision to defer would have been different had the notice been provided. Please refer to the IRS Correction Programs for more detail on when to use the Self Correction Program (SCP), Voluntary Correction Program (VCP) and Audit Closing Agreement Program (Audit CAP) and other Fix-It Guides containing guidance on how to fix common mistakes. Additionally, the IRS addressed this issue in its Retirement News for Employers newsletter, Fall 2008 edition. In all cases, it is important for the employer to review its administrative procedures to eliminate the likelihood that the error will recur.
Similar notices must be distributed to participants when the plan decides to abandon the safe harbor feature. The abandoning notice has the same requirements as the regular notice in regard to timing and distribution. The plan must provide details concerning the plan amendment to abandon the safe harbor formula and the effective date when these contributions will end. This notice allows time for participants to make desired changes to their deferrals before the amendment becomes effective.
For more detail please see our previous blogs, How to Stop a Safe Harbor Non-Elective Contribution and the possibility of distributing “Maybe” Notices for Safe Harbor Plans. Failing to provide a safe harbor notice can be expensive to a plan sponsor. Corrective contributions to plan participants may be necessary. Additionally, DOL regulations impose penalties of up to $1,000 per day for failure to provide disclosures, such as Qualified Automatic Contribution Arrangement (QACA), which is a type of safe harbor plan. Needless to say, the best policy is to avoid penalties and correction programs.
Remember, if you have a safe harbor plan, don’t forget to distribute your safe harbor notices by December 1.