On the heels of a 2010 401(k) compliance check questionnaire, in response to which as many as 43 percent of responding plan sponsors reported that their plans were safe harbor plans, the IRS has launched an examination project targeting 401(k) safe harbor plans. Although not limited solely to examining compliance with the safe harbor rules, compliance with those rules will be at the forefront of the IRS’s review.
Safe harbor 401(k) plans come in two varieties:
- A plan may provide that the employer will make a matching contribution equal to (i) 100 percent of an employee’s elective deferrals, up to three percent of the employee’s compensation, and (ii) 50 percent of an employee’s elective contributions that exceed three percent of his compensation, but do not exceed five percent of the employee’s compensation.
- A plan may provide that the employer will make a nonelective contribution equal to at least three percent of an employee’s compensation.
A 401(k) plan that is not a safe harbor plan must pass certain nondiscrimination testing requirements. IRS regulations stipulate that a plan that provides for a safe harbor matching contribution or a safe harbor non-elective contribution may not use the nondiscrimination test if the safe harbor is not met. Accordingly, plan sponsors who have failed to make required safe harbor contributions may wish to examine their options under the IRS’s employee plans compliance resolution system program (otherwise known as the EPCRS program), as the costs of correction may be significantly greater if the failure is discovered by the IRS during an audit.