Avoiding Safe Harbor 401(k) Plan Compliance Traps ...media.straffordpub.com/products/avoiding-safe... · 8/6/2019 · Avoiding Safe Harbor 401(k) Plan Compliance Traps: Effective

Avoiding Safe Harbor 401(k) Plan Compliance

Traps: Effective Administration, Contribution

and Vesting RequirementsIRS Examinations and Annual Testing, Correcting Failed 401(k) Plan,

Employee Notice Requirements, Drafting Safe Harbor Provisions

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TUESDAY, AUGUST 6, 2019

Presenting a live 90-minute webinar with interactive Q&A

Bret Hamlin, Shareholder, Hill Ward Henderson, Tampa, Fla.

J. Rose Zaklad, Principal, Groom Law Group, Washington, D.C.

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Avoiding Safe Harbor 401(k) Plan Compliance Traps: Effective Administration, Contribution and Vesting Requirements

Bret Hamlin, Hill Ward Henderson

J. Rose Zaklad, Groom Law Group

August 6, 2019

What we’ll cover

Traditional v. safe harbor 401(k) plans

IRS nondiscrimination testing requirements

Structuring effective safe harbor plans

Employee notice requirements

Additional testing considerations

Best practices for effective administration

Background

• 401(k) plan must meet qualification requirements to retain tax-favored treatment

• Plan must demonstrate that it does not discriminate in favor of highly compensated employees (HCEs) by:

• passing nondiscrimination tests OR

• satisfying the “safe-harbor” requirements

Traditional vs. safe-harbor 401(k)


• Employer Contributions• Traditional: none required

• SH: minimum 4% match (up to 6% of comp), 3% non-elective

• Vesting• Traditional: 3-year cliff or 6-year graded

• SH: immediate


• Plan Document• Traditional: must reflect nondiscrimination testing

• SH: • safe harbor changes adopted before plan year

• restrictions on mid-year amendments – IRS Notice 2016-16

• Participant Notice• Traditional: none required

• SH: Annual SH notice to eligible employees & mid-year updates


What is a QACA?

• Safe harbor with automatic enrollment/escalation

• Automatic deferral percentage (minimum)• Year 1: 3%

• Year 3: 4%

• Year 4: 5%

• Year 5 and beyond: 6%

• Maximum automatic deferral percentage: 10%


What is a QACA?

• Employer contributions: • Minimum 3.5% match or

• 3% non-elective

• Vesting: 2 year cliff

• Participant notice: same as SH notice, plus more!

IRS nondiscrimination testing

• Generally, SH plan is deemed to pass:• ADP

• ACP

• Top-heavy

• SH plan is not deemed to pass other tests, including:• 410(b)

• 414(s)

• 401(a)(4) BRF

• limits testing


• ADP• elective deferrals/Roth (not catch-up)

• compare contributions for HCEs vs. non-HCEs

• ACP• matching and after-tax employee contributions

• similar to ADP

• Top-Heavy• total account balance

• compare balances for key employees vs. non-key employees


How to correct for failed testing?

• ADP/ACP • Distribute excess amounts to HCEs

• Additional contributions (QNECs and QMACs) to non-HCEs

• Possible excise tax

• EPCRS – Rev. Proc. 2019-19

• Top-Heavy• Minimum contributions

Structuring safe harbor plans

Considerations for adopting SH plan

• Cost

• Administration

• Controlled group

• Other features

Structuring safe harbor plans

Implementation steps

• Determine design

• Amend plan

• Prepare and distribute annual notice

• Update SPD

Employee Notice Requirements

Annual notice requirement

• Contents of notice

• Timing of notice • Current participants

• Newly eligible employees

• New plans

• Mid-year changes to the plan

• Failure to provide timely notice


Contents of notice

• The notice must be sufficiently accurate and comprehensive to appraise the employee of the employee’s rights and obligations under the safe harbor arrangement and the notice must be written in a manner calculated to be understood by the average employee eligible to participate. IRC section 401(k)(12)(D).


Contents of notice

• IRC section 401(k)(12) and section 401(k)(13) (“QACA”) minimum content requirements

• The safe harbor matching contribution or safe harbor nonelective contribution formula

• Any other contributions under the plan or matching contributions to another plan on account of elective contributions or employee contributions (i.e., after-tax employee contributions) under the plan, including the potential for discretionary matching contributions and the conditions under which such contributions are made (reference to SPD provision permitted)


Contents of notice


• The plan to which safe harbor contributions will be made if different than the plan containing the cash or deferred arrangement (reference to SPD provision permitted)

• The type and amount of compensation that may be deferred under the plan (reference to SPD provision permitted)

• How to make cash or deferred elections, including any administrative requirements that apply to such elections


Contents of notice


• The periods available under the plan for making cash or deferred elections

• Withdrawal and vesting provisions applicable to contributions under the plan


Contents of notice


• Information that makes it easy to obtain additional information about the plan (including an additional copy of the SPD) such as telephone numbers, addresses and, if applicable, electronic addresses, of individuals or offices from whom employees can obtain such plan information


Contents of notice

• Additional notice minimum content requirements for section 401(k)(13) (“QACA”) safe harbor plans

• The level of elective contributions which will be made on the employee’s behalf if the employee does not make an affirmative election

• The employee’s rights under the arrangement to elect not to have elective contributions made on the employee’s behalf, or elect to have such contributions made in a different amount or percentage of compensation


Contents of notice

• Additional notice minimum content requirements for section 401(k)(13) (“QACA”) safe harbor plans

• How contributions under the arrangement will be invested, including, in the case of an arrangement under which the employee may elect among 2 or more investment options, how contributions will be invested in the absence of an investment election by the employee


Timing of notice

• Current employees• The notice must be provided within a reasonable period before the

beginning of the plan year. The determination of whether the timing requirement is satisfied is based on all of the relevant facts and circumstances

• The timing requirement is deemed to be satisfied if at least 30 days, and no more than 90 days, before the beginning of each plan year the notice is provided to each eligible employee


Timing of notice

• Newly eligible employees• The notice must be provided within a reasonable period before the

employee becomes eligible

• The timing requirement is deemed to be satisfied if the notice is provided no more than 90 days before the employee becomes eligible and no later than the date the employee becomes eligible

• QACA safe harbor notice for newly eligible employees• The employee must have a reasonable period of time after the receipt of the

notice and before the first automatic contribution is made to make affirmative contribution and investment elections


Timing of notice

• New plans• The notice timing requirements applicable to newly eligible employees

also apply to new plans

• Mid-year changes to plans• Mid-year changes that affect the notice minimum content requirements

require than an updated notice be provided describing the mid-year change and its effective date

• The updated notice must be provided within a reasonable period before the effective date of the change, unless it is not practicable to do so (e.g., in the case of a retroactively effective change)


Failure to provide timely notice

• A failure to provide timely notice is a plan operational failure• Reasonable period of time vs. 30 day to 90 day deemed satisfaction

rule

• Correction under EPCRS – SCP vs. VCP

• Safe harbor nonelective contribution

• Safe harbor matching contribution

Additional Testing Considerations

• Coverage testing

• Top heavy testing

• ADP and ACP testing

• 401(a)(4) general testing

• 401(a)(4) benefits, rights and features testing

• 414(s) compensation testing

• 415 annual additions testing

• 402(g) limits


Coverage testing

• Mandatory disaggregation (e.g., collectively bargained employees)

• Statutory employees

• Otherwise excludable employees


Top heavy testing

• Deemed non-top-heavy status if certain requirements are satisfied

• The plan must consist sole of• a cash or deferred arrangement that satisfies the safe harbor provisions of IRC

section 401(k)(12) or the QACA safe harbor provisions of IRC section 401(k)(13), and

• matching contributions that satisfy the ACP safe harbor provisions of IRC section 401(m)(11) or IRC section 401(m)(12)


Top heavy testing

• Safe harbor nonelective contributions and safe harbor matching contributions may be used to satisfy top heavy minimum contribution requirement

• Different eligibility requirements for otherwise excludable employees subjects a plan to top heavy testing

• Top heavy required aggregation group rules apply to safe harbor plans


ADP and ACP testing

• A plan that satisfies the ADP safe harbor requirements must also satisfy the ACP safe harbor requirements in order to be exempt from ACP nondiscrimination testing

• Matching contributions cannot be made on elective deferral contributions that exceed 6% of compensation

• Rate of matching contributions cannot increase as rate of elective deferral contributions increases

• Discretionary matching contributions cannot exceed 4% of compensation


ADP and ACP testing

• A safe harbor plan that has different eligibility requirements for otherwise excludable employees will be subject to ADP and ACP testing requirements

• For example, a plan that has immediate eligibility for statutory employees with respect to elective deferral contributions and safe harbor contributions, but that requires one year of service for otherwise excludable employees for safe harbor contributions, must satisfy the ADP testing requirements with respect to the otherwise excludable employees


401(a)(4) general testing

• There is no exemption from the 401(a)(4) general testing requirements for a safe harbor plan

• A safe harbor plan that uses the safe harbor nonelective contribution plan design and that has different eligibility requirements for otherwise excludable employees with respect to discretionary nonelective contributions that are subject to general testing under 401(a)(4) is subject to minimum gateway contribution requirements


401(a)(4) benefits, rights and features testing

• There is no exemption from the 401(a)(4) benefits, rights and features testing requirements for a safe harbor plan


414(s) compensation testing

• The definition of compensation for purposes of calculating safe harbor contributions must satisfy 414(s)

• If the plan uses a definition of compensation is not a 414(s) safe harbor definition for purposes of calculating safe harbor contributions, then the definition of compensation must be tested annually to demonstrate that it is nondiscriminatory under 414(s)


415 annual additions testing

• No special testing rules apply to 415 annual additions testing for safe harbor plans

402(g) limits

• No special rules apply to the 402(g) limits for safe harbor plans

Best Practices for Effective Administration

• Internal controls for safe harbor notices

• Internal controls for QACA automatic contributions and automatic contribution escalation

• Consider soliciting affirmative elections for participants who do not want to be automatically enrolled in the QACA

• Consider using the 90-day distribution option for participants who have automatic contributions made on their behalf

• Consider using the “wait and see” notice option for a plan using or considering the safe harbor nonelective contribution plan design

Questions?

Please free to contact us with your questions.

Bret Hamlin

[email protected]

J. Rose Zaklad

[email protected]

Documents

Avoiding Safe Harbor 401(k) Plan Compliance Traps ...media.straffordpub.com/products/avoiding-safe... · 8/6/2019 · Avoiding Safe Harbor 401(k) Plan Compliance Traps: Effective