New Safe Harbor Rules: IRS Improves Guidance

The IRS has received numerous comments and suggestions regarding ways to make it easier for employers both to adopt and to administer 401(k) safe harbor plans.

On January 24, 2000 the IRS issued Notice 2000-3. The notice provides additional guidance regarding 401(k) plans that are intended to satisfy the 401(k) safe harbors. The following is a summary of the IRS notice:

• Encourages adoption of 401(k) safe harbor plans by giving sponsors of existing 401(k) plans the flexibility to wait as late as December 1 of a calendar year to decide to adopt the 401(k) safe harbor 3-percent employer non-elective contribution method for that calendar year;

• Permits 401(k) safe harbor plans to match elective or employee contributions on the basis of compensation for a payroll period, month, or quarter;

• Provides an extended period of time, until May 1, 2000, for 401(k) plan sponsors adopting the 401(k) safe harbor methods for the first time in 2000 to provide the required safe harbor notice to employees;

• Provides explicitly that 401(k) safe harbor plans are permitted to require salary reduction elections to be made using whole percentages of pay or whole dollar amounts;

• Permits plan sponsors to provide the 401(k) safe harbor notice electronically and otherwise simplifies the notice requirement;

• Permits 401(k) safe harbor plans to provide matching contributions on an employee's aggregate employee and elective contributions;

• Makes clear that 401(k) safe harbor plans are permitted to apply to employee after-tax contributions a suspension similar to the 12-month suspension that may be applied to employee elective contributions after an in-service withdrawal of those contributions;

• Permits plan sponsors using the 401(k) safe harbor matching contribution method, to exit the safe harbor prospectively during a plan year (and switch to ADP and ACP nondiscrimination testing) if employees are notified beforehand;

• Clarifies the interaction between the 401(k) safe harbors and the election to separately test otherwise excludable employees for purposes of the section 410(b) minimum coverage requirements;

• Makes clear how the 401(k) safe harbor rules apply in the case of a profit sharing plan to which a 401(k) feature is added for the first time during a plan year.

In addition to modifying the guidance provided in Notice 98-52, 1998-46 I.R.B. 16, relating to 401(k) safe harbor plans, this notice requests comments regarding two significant areas that relate to 401(k) plans in general.

1. Potential approaches for simplifying the multiple use test applicable to section 401(k) plans,
2. Potential approaches for applying the highly compensated employee definition under section 414(q), the nondiscrimination requirements under section 401(k) and 401(m), and possibly other applicable qualification requirements, when a plan sponsor is involved in a merger, acquisition, disposition, or similar transaction.

Safe Harbor plans continue to be an excellent way for certain plan sponsors to meet their retirement plan objectives.

© Administrative Retirement Services, Inc.  2000
Published by Administrative Retirement Services, Inc., E-mail address:  arsinc@prodigy.net.  Copyright 2001 by Administrative Retirement Services, Inc. Reproduction in whole or in part is prohibited except by written permission. All rights are reserved.  Information has been obtained by Administrative Retirement Services, Inc. from sources believed to be reliable. However, because of the possibility of human or mechanical error by our sources, Administrative Retirement Services, Inc. or others, Administrative Retirement Services, Inc. does not guarantee the accuracy, adequacy, or completeness of any information and is not responsible for any errors or omissions or the result obtained from the use of such information.  Readers should seek specific advice before acting with regard to the subjects mentioned here.

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