One of the most unfortunate working relationships I had was when working for a client who had another ERISA attorney on retainer. This ERISA attorney was conducting a review of the plan including its administrative procedure. My Retirement Plan Tune-Up can do that for $750, his review cost about $100,000+. Mind you, this was not Microsoft’s 401(k) plan, but the plan of a medium sized business. That being said, I was asked by the plan’s financial advisor to draft a notice to interested parties regarding a plan amendment that was made that the client wanted an approval letter on. I drafted the notice, based on the one provided to me by my plan document provider. The ERISA attorney reviewed it and claimed that it did not have all the language and therefore would disqualify the Plan if used. The notice had all the required information and even if it didn’t, it was hardly something that would disqualify the plan. The ERISA attorney was trying to justify his extravagant fee and knock my low, flat fee. Of course, the ERISA attorney’s hyperbole was a bit dramatic because it really lacked common sense, the Internal Revenue Service (IRS) would never disqualify a plan because of a missing notice. Plan disqualifications are the ultimate sanction for qualified retirement plans and are used only in the rarest of circumstances. A notice with two lines missing isn’t going to do it.
Whether it’s an ERISA attorney or a competent third party administrator, we certainly know what the rules are when it comes to having the plan comply with the Internal Revenue Code and ERISA. Rules govern notices, discrimination tests, salary deferrals, and participation, and a retirement plan needs to comply with. I have always said that if I ever wanted to find an error in a retirement plan, I can certainly find one. The error in administration or plan document design might be so minimal, but I am sure I can find one in every plan I will review. The reason is that you have so many important qualification rules such as making sure the plan doesn’t discriminate in favor of highly compensated employee, that some of the smaller ones are forgotten about. So while we strive for perfection in plan administration, most of us know we won’t get there. However, there are errors that even the IRS will forgive on audit because even they don’t want to deal with such minutiae.
One detail of minutiae deals with safe harbor 401(k) plans. The safe harbor plans have been around since 1999 and are an effective plan design tool because a plan could avoid a discrimination test it knew it would fail by making a fully vested contribution to non-highly compensated employees either in a profit sharing or matching contribution. One of the most important requirements for an existing plan is the hand out of a safe harbor notice annually to all participants between 30 to 90 days prior to the start of the Plan Year. So you know what I am doing around November 15th. While the safe harbor notice is required for the safe harbor contribution to be made, it has been my argument for the last 12 years is that if the safe harbor contribution is not handed out in time, the Internal Revenue Service is not going to raise a stink over it. Why? Common sense would tell you that the Internal Revenue Service isn’t going to stop plan participants from receiving a fully vested contribution from their employer, especially when they are non-highly compensated employees.
I know what you are saying, I am speaking blasphemy. I am saying that even if you don’t follow the rules, you still may get away with having a safe harbor plan. Well, my 12 year assumption was correct when I had a safe harbor plan audited. A notice was provided to the Plan and by all counts, it was provided on time. The auditor reviewing the plan noted that some of his superiors have indicated that an agent on plan audit can not dwell on when a safe harbor notice was posted or handed out or when because there is no way to determine whether the plan sponsor complied with the safe harbor notices or not. In addition, he confirmed my hunch. The IRS is not likely to stop an employer from giving fully vested contributions to employees. All the IRS wants to hear that the employer gave the notice at least 30-90 days prior to the plan year, whether they did or not.
So like Animal Farm, we do have rules on retirement plans that are more equal than others. Limitations on deductible contributions, plan discrimination in favor of highly compensated employees, prohibited transactions, and improper plan distributions are more important to the IRS than whether a safe harbor notice is distributed on time. As an ERISA attorney, I am cognizant of what the rules, but I have enough common sense to determine what issues may raise IRS sanction and what will be ignored. I’m not Chicken Little and the sky isn’t falling.