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How Do I Correct Failure to Provide a Safe Harbor 401(k) Plan Notice? It Depends!

Posted in Benefits

In the “IRS Retirement News” published by the Internal Revenue Service (the “Service”) on February 24, 2014, the Service reminds us that the failure of a safe harbor 401(k) plan to provide an annual notice to participants constitutes a failure to operate the plan in accordance with its provisions.  In order to protect the qualified status of the plan, it is imperative that the plan sponsor take appropriate steps to correct this operational failure.  The method of correction, however, will depend on how the failure affects the participants.

The safe harbor 401(k) plan notice informs the eligible employees of their rights and obligations under the plan, including, if applicable, the fact that the plan sponsor intends to make a matching contribution with respect to salary deferral elections made under the plan.  Such notices are required to be sent within a reasonable period before the beginning of each plan year (generally, at least 30 days but no more than 90 days before such plan year) and, with respect to newly eligible employees, within the 90-day period ending on the date of such employee’s eligibility to participate in the plan.

With respect to a participant who has received a prior year’s safe harbor notice and, based on the facts and circumstances, is considered by the plan sponsor to be informed of the plan’s features, the failure to provide the 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.  On the contrary, 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 under the Employee Plans Compliance Resolution System (Rev. Proc. 2013-4). That is, the employer must contribute 50% of the excluded employee’s missed deferral, which is calculated as 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, plus 100% of the missed matching contribution (adjusted for earnings). Under no circumstance, however, can a plan sponsor correct this failure merely by “opting-out” of safe-harbor status (i.e. by satisfying the actual deferral percentage (ADP) and/or actual contribution percentage (ACP) tests for the plan year of the failure).