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Fixing Common Plan Mistakes - Failure to Provide a Safe Harbor 401(k) Plan Notice

A safe harbor 401(k) plan requires the employer to provide:

  • timely notice to eligible employees informing them of their rights and obligations under the plan, and
  • certain minimum benefits to eligible employees either in the form of matching or nonelective contributions.

Safe harbor notices should be sent within a reasonable period before the beginning of each plan year. In general, the law considers notices timely if the employer gives them to employees:

  • at least 30 days (and no more than 90 days) before the beginning of each plan year
  • in the year an employee becomes eligible, generally no earlier than 90 days before the employee becomes eligible and no later than the eligibility date.

At a minimum, the notice must provide details on:

  • 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 salary deferral elections,
  • the specific time periods under the plan to make salary deferral 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).

Failure to provide safe harbor notices

The failure to provide a safe harbor notice is a failure to operate the plan in accordance with its safe harbor provisions. The plan has an operational failure because it failed to operate in accordance with the terms of the plan document. The plan sponsor cannot “opt out” of safe harbor plan status for the year simply by performing the ADP/ACP tests for the year of the failure.

The appropriate correction of this failure depends on the impact on individual participants.

Example: Rainbow Company’s safe harbor 401(k) plan makes matching contributions of 100% of elective contributions up to 3% of the employee’s compensation plus 50% of elective contributions greater than 3%, but not more than 5% of the employee’s compensation. Eligible employees received timely notices in 2011 and 2012. However, Rainbow failed to provide the safe harbor notice to its employees for the 2013 plan year. In addition, Rainbow didn’t furnish notices to employees who became eligible to participate in the plan in 2013. Rainbow discovered the problem when it conducted an internal review of its plan operations at the end of 2013.

Violet first became eligible to participate in the plan on January 1, 2013. She did not receive notice and Rainbow did not inform her of her right to make elective contributions to the plan. She earned $20,000 in compensation in 2013.

Indigo has been a participant in the plan since 2011. She has made elective contributions of 2% of compensation each year, after receiving notices in 2011 and 2012. While she did not receive a notice for the 2013 plan year, the human resource department informed her that the employer’s matching contribution formula will remain the same for 2013 and that she should inform HR if she wanted to make any changes to her elective contributions for 2013.

Fixing the mistake

The appropriate correction for a late safe harbor 401(k) notice depends on the impact on individual participants. For example, if the missing notice results in an employee not being able to make elective deferrals to the plan (either because he was not informed about the plan, or informed about how to make deferrals to the plan), then the employer may need to make a corrective contribution that is similar to what might be required to correct an erroneous exclusion of an eligible employee.

On the other hand, if an employee was otherwise informed of the plan’s features and the method for making elective deferrals, the failure to provide notice may be treated as an administrative error that would be corrected by revising procedures to ensure that future notices are provided to employees in a timely manner.

Example: In the facts above, Rainbow must evaluate the impact of not providing its eligible employees a safe harbor notice. The correction might be different for each affected employee. As illustrated in this example, the failure to provide notice could require treating the individual as an excluded eligible employee or simply revising an administrative procedure for an existing participant.

Excluding an eligible employee. Violet belongs in this category. Due to its failure to notify Violet, 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 her missed matching contributions because Rainbow improperly excluded her from the plan. Calculate corrective contributions as follows:

  1. Missed deferral opportunity: If an employee is not given 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 Internal Revenue Code Section 401(k)(12), then the employer must contribute 50% of the excluded employee’s missed deferral. An employee’s missed deferral is the greater of:
    • 3% of compensation, or
    • the maximum deferral percentage for which the employer matches at a rate 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 must make a corrective contribution to replace Violet’s missed opportunity to make elective contributions of $300 (adjusted for earnings).

  1. Missed matching contribution: If Violet made an elective deferral of $600, she would have received an employer matching contribution of $600. Rainbow must 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 plan’s failure to give her a notice did not prevent her from making an informed timely election to change (or maintain) her elective contributions to the plan. No corrective contribution for Indigo is required. However, the plan must change its procedures to ensure that she receives timely notices in the future.

Correction programs available

Failure to provide timely notices to employees can be corrected using the correction programs described in Revenue Procedure 2013-12:

Finding and avoiding the mistake

In order to find the mistake, review:

  • the plan’s procedures for issuing notices
  • the plan’s records showing that the employer followed the plan’s procedures for distributing notices
  • employee deferral decisions. If many eligible employees are either not making elective contributions or deferring at low rates, it’s possible that they didn’t have timely access to the information contained in the notice.

Employers should maintain a calendar for due dates by which certain tasks need to be completed. For a safe harbor 401(k) plan, this includes timely distributing notices to eligible employees.

Page Last Reviewed or Updated: 09-Jan-2014