Failed to Provide Safe Harbor Notice?

In a recently updated page on the Internal Revenue Service (IRS) website, the agency notes that 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; and 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.

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 IRS says.

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.

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, adjusted for earnings. 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.

The plan sponsor must also contribute the amount of matching contribution (adjusted for earnings) the employee would have received.

Examples, as well as tips for finding and avoiding this mistake, are included in the IRS’s web page here.