You can’t just WISH yourself into SAFE HARBOR PLAN status

Posted by Maria T. Hurd, CPA

Safe Habor Retirement PlanMuch like people who make a wish to be fit with the turkey wishbone after a Thanksgiving feast, many plan sponsors think that their INTENT to be a safe harbor plan is a sufficient defense when they have not met the requirements to be a safe harbor plan. Although Keeping it Simple and Straightforward, as discussed in our previous blog, is one of the goals of a safe harbor plan, achieving safe harbor plan status requires:

1. Adopting a Safe Harbor Plan Document,

2. Contributing one of the pre-approved safe-harbor employer contributions, AND

3.  Sending Annual Safe Harbor Notices to all eligible employees

Each of the above three steps is required, such that compliance with one or two out of the three does not make a plan a safe harbor plan, but many plan sponsors try to use the “best two out of three” argument in their own defense.

For example, let’s say Company A submits incomplete census information to the third-party administrator (TPA) that computes the plan’s discrimination testing. Even if the employer contribution is consistent with a safe harbor formula, if the document is not a safe harbor document and a safe harbor notice has never been distributed, the plan is not a safe harbor plan and is not exempt from discrimination testing.

In certain cases, a plan sponsor can comply with all three of the rules enumerated above and still be subject to compliance testing. For instance, Company B has a safe harbor plan document, distributes a safe harbor notice, and makes a safe harbor employer contribution. Thinking that their plan is covered by the safe harbor protection, Company B makes an additional, class-based, discretionary profit sharing contribution which triggers the requirement for discriminiation testing and the top-heavy minimum contribution rules. Although it is possible to provide additional contributions and still be exempt from the ADP/ACP tests, it is crucial to engage a plan document provider that knows the common pitfalls. For example, safe harbor plans cannot have a two-year eligibility period or a last day of employment requirement.  Highly Compensated Employees cannot receive a rate of match at any level of deferral that is greater than the rate of match received by any Non-Highly Compensated Individual at the same level of deferral. Many of these rules are often overlooked by plan sponsors when their plans offer the opportunity to contribute additional discretionary amounts. If the additional contributions fail to comply with the safe harbor rules, the plan becomes subject to discrimination testing.

Last but not least, safe harbor plans must distribute a timely notice to all eligible employees at least 30 days, but not more than 90 days before the beginning of each plan year. That means the deadline for calendar year plans is Friday, November 29, 2013. If the day after Thanksgiving is a holiday for your company or organization, then the Notice must be distributed by Wednesday, November 27! (Clarification: The deadline is 30 days before January 1 (i.e., December 2) but it would be even better to beat the Holiday vacation and do it before Thanksgiving.) Generally, third-party administrators provide templates to their clients of a compliant safe harbor notice containing all the required disclosures to participants. In certain cases, “Maybe” Notices for Safe Harbor Plans may be more appropriate, as discussed in our previous blog. Although the IRS provides guidance for “Fixing Common Plan Mistakes – Failure to Provide a Safe Harbor 401(k) Plan Notice,” the suggested corrections generally involve making corrective contributions on behalf of employees that were negatively affected by the employer’s failure to distribute the safe harbor notice. Rather than going through the inconvenient and potentially costly process of executing a correction, employers should make sure that they take the steps necessary to BE a safe harbor plan, rather than wishing themselves safe.

Photo by Roger Smith (License)

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