Failure to Provide a Safe Harbor 401(k) Plan Notice
If you have a safe harbor 401(k) plan, you are generally required to provide a Safe Harbor Notice or a Conditional Safe Harbor Notice between 30 and 90 days before the first day of the plan year and employees who become eligible after the notice period must receive the notice by their date of eligibility. What happens if you don't send the notice? This was discussed in the Retirement News for Employers – Summer 2009 Edition in Fixing Common Plan Mistakes: Failure to Provide a Safe Harbor 401(k) Plan Notice. It details the minimum items that must be included in the notice:
- whether the employer will make matching or nonelective contributions,
- other contributions under the terms of the plan,
- the plan to which the safe harbor contributions are made, if more than one plan,
- the type and amount of compensation that may be deferred under the plan,
- how to make cash or deferred elections,
- the specific time periods available under the plan to make cash or deferred elections,
- withdrawal and vesting provisions for plan contributions, and
- how to easily obtain additional information about the plan (including a copy of the summary plan description).
The article provides a case study of a company that stopped providing the notices, including a discussion of finding and fixing the mistake:
Finding the Mistake:
In order to find the mistake, review:
The deferral decisions among eligible employees. If many eligible employees are either not making elective contributions or deferring at low rates, it is possible that they did not have timely access to the information contained in the notice.
The plan's procedures for issuing notices.
The plan's records showing that the employer followed the plan's procedures relating to the distribution of notices.
Fixing the Mistake:
Rainbow must evaluate the impact of its failure to provide notice to its eligible employees. The solution might be different for each affected employee. As illustrated in this problem, the failure to provide notice could require correction for the exclusion of an eligible employee or a simple revision to an administrative procedure.
Exclusion of an eligible employee. Violet belongs in this category. Due to its failure to provide notice, Rainbow did not inform Violet of her ability to make an elective contribution when she was eligible. To correct the failure, Rainbow must make a corrective contribution for Violet to replace her missed deferral opportunity and the missed matching contributions that occurred because Rainbow improperly excluded her from the plan. The corrective contributions are determined as follows:
Missed deferral opportunity: If an employee is not provided with the opportunity to elect and make elective deferrals to a safe harbor §401(k) plan that uses a rate of matching contributions to satisfy the safe harbor requirements of §401(k)(12), then the missed deferral is deemed equal to the greater of 3% of compensation or the maximum deferral percentage for which the employer provides a matching contribution rate that is at least as favorable as 100% of the elective deferral made by the employee. Violet's missed deferral is 3% of her compensation of $20,000, or $600. Violet's missed deferral opportunity is 50% of her missed deferral of $600, or $300. Rainbow needs to make a corrective contribution to replace Violet's missed opportunity to make elective contributions of $300 (adjusted for earnings).
Missed matching contribution: If Violet made an elective deferral of $600, she would have received an employer matching contribution of $600. Rainbow needs to make a corrective contribution to replace the missed matching contribution of $600 (adjusted for earnings).
Fixing an administrative problem. Indigo belongs in this category. The failure to provide notice did not prevent her from making an informed timely election to change (or maintain) her elective contribution to the plan. No corrective contribution for Indigo is required. The plan needs to reform its procedures to ensure that she receives timely notices in the future.
It also discusses how the Employee Plans Compliance Resolution System (EPCRS) as provided by IRS Revenue Procedure 2008-50 - Closing agreements is available to correct the mistake and recommends a best practice of maintaining a calendar for plan due dates which includes the timely distribution of safe harbor notices.
Corrective Failure to Provide the Safe Harbor 401(k) Notice – Has the IRS Adopted the "No Harm, No Foul" Rule? notes that up to this point, the IRS has not specifically provided a recommended method of correction in the EPCRS and has informally recommended filing under VCP and negotiating a settlement. It highlights the significance of the informal position discussed in the Retirement News for Employers – Summer 2009 Edition as discussed above:
Although the newsletter does not carry the weight of EPCRS or other official pronouncements, it does provide us with an informal indication of the IRS's position. Since EPCRS does not mandate a particular correction method, formulating a method of self-correction based on the IRS newsletter would seem a reasonable approach.
The article also provides a chart that provides the corrective contribution and evidence justifying no corrective contribution for each of the following seven scenarios:
- New participant - employer did not inform participant of deferral opportunity
- New participant - participant is aware of deferral opportunity
- Existing participant with a deferral election; no change in matching formula
- Existing participant with no deferral election; no change in matching formula
- Existing participant with deferral election at highest match level; employer increases matching formula and participant is unaware of increase
- Existing participant with deferral election at highest match level; employer increases matching formula and participant is aware of increase
- Existing participant with a deferral election or without a deferral election but aware of deferral opportunity; plan provides safe harbor nonelective contribution
It also discusses the ramifications of providing a late notice, reforming your administrative procedures, and the implications of failing to provide a safe harbor nonelective contribution notice:
- Late notice vs. no notice. The IRS did not specifically address the issue of a late notice versus not providing the notice. However, the logical conclusion from the example is that an employer who provides the notice late as opposed to not at all will cut off the need to provide further corrective contributions. For example, if an employer provided the notice three months into the plan year, the employer only would need to make a corrected contribution to the adversely affected participants for the three month period and not for the entire plan year.
- Administrative procedure. In order to complete the correction, the IRS requires the employer to reform its administrative procedures to ensure that future failures do not occur. For example, the employer could establish a calendar identifying due dates by which it must complete certain plan tasks. The employer should commit to writing (e.g., memorandum for the file) the reforms it is adopting. The written description of the implemented changes is particularly important if the employer's correction does not involve a corrective contribution. The employer also should document why the failure to provide the notice did not affect certain employees. Comment: IRS examiners are more persuaded by documents created at the time of correction than a verbal explanation given at an audit.
- Safe harbor nonelective contribution. The IRS does not discuss the correction for a plan providing the safe harbor nonelective contribution rather than the safe harbor match. However, IRS officials have stated several times that an employer maintaining such a plan probably could correct a failure to provide the safe harbor notice simply by providing the notice late (even if it were after the beginning of the plan year) and correcting its administrative procedures to prevent further failures. Of course, if an employer failed to inform a particular participant of his/her right to make elective deferrals, the employer would need to correct using the improper exclusion of an eligible employee method.
Links to the relevant regulations:
Treasury Regulation Section 1.401(k)-3 Safe harbor requirements
Treasury Regulation Section 1.401(m)-3 Safe harbor requirements