2007 Safe Harbor 401(k) Notice
Rev. 12/15/06, E-mail Alert 2006-23

Background
Because of a change in the requirements for the contents of the safe harbor notice contained in the Final 401(k) Regulations, notices used in previous years are no longer compliant for the 2007 plan year. This change is related to what may be incorporated by reference to the SPD in the safe harbor notice. Notice 2005-95 relieved plans from the need to issue an updated notice, but only for the 2006 plan year. The IRS has since made it clear that the notice update would be required for the 2007 plan year and it has resisted easing the requirements for future years.

Therefore, we provided an updated safe harbor notice to our clients for issuance to participants of plans electing safe harbor status for 2007. For calendar year safe-harbor plans, this notice was required to be issued no later than December 1, 2006.

(Note, this does not mean that McKay Hochman has given up trying to reverse what Rich Hochman and others deem to be an obvious IRS misjudgment of participant reading comprehension skills.)

The Safe Harbor 401(k) Notice Requirements
According to the Regulations, a safe harbor notice is not considered sufficiently accurate and comprehensive unless it accurately describes:

• The Safe-Harbor Matching Contribution formula (including the levels of Safe-Harbor Matching Contributions, if applicable) or the Safe-Harbor Nonelective Contribution formula used under the Plan;
  
• Any other contributions under the Plan including any matching contribution made to another plan on account of the elective contributions or employee contributions made under the Plan. This includes disclosing the potential for discretionary matching contributions, and the conditions under which such contributions will be made;
  
• The plan to which Safe-Harbor Contributions will be made (if different than the plan containing the cash or deferred arrangement);
  
• The type and amount of compensation that may be deferred under the Plan;
  
• The procedure to make cash or deferred elections; including any administrative requirements that may apply to such elections;
  
• The withdrawal and vesting provisions applicable to contributions under the Plan; and
  
• Information for participants to obtain additional information about the Plan (including an additional copy of the SPD). Such items include telephone numbers, addresses and, if applicable, electronic addresses of individuals or offices from which employees may obtain such Plan information.

SPD References
A safe harbor notice may still cross-reference certain relevant portions of the Summary Plan Description without becoming non-compliant with the regulation. The following information may be provided by cross reference to the SPD:

• Other contribution types under the Plan and the conditions under which such contributions are made.
  
• The plan to which contributions, other than the safer harbor contribution are made, if different from this Plan.
  
• The type and amount of compensation that may be deferred.
  

Withdrawal and Vesting Provisions No Longer Permitted by Reference to the SPD
The most significant change made by the Regulations is that the plan's withdrawal and vesting provisions can no longer be incorporated by reference to the SPD. Thus, the in-service, hardship and retirement withdrawal provisions and vesting schedules relating to non safe-harbor matching contributions and discretionary nonelective contributions must now be included in the 2007 safe harbor notice. Depending on the flexibility of the Plan, the Notice can reach five or more pages in length.

Discretionary Profit-Sharing Contributions
A TPA with an employer whose plan theoretically offered a discretionary profit-sharing contribution, but had not made a discretionary profit sharing in years and didn’t intend to for years to come, wanted to change our Notice to say that other potential contributions under the Plan (completely unrelated to the safe harbor) would be addressed in the SPD. They didn’t want to reflect a contribution that wasn’t being made. We told them that it was possible with regard to the other contributions and the conditions on their accrual, such as last day and hours of service requirements. However, they had to discuss the withdrawal and vesting provisions for those nonexistent contributions in the Notice. They might be better advised to amend the plan to delete the profit-sharing contribution possibility.

Timing requirement

General rules: Provide the notice within a reasonable time before the beginning of the plan year.
The notice is deemed to satisfy the timing requirement if it is provided to each eligible employee not less than 30 days but not more than 90 days before the beginning of each plan year.
Newly eligible participant (defined as becoming eligible after the 90th day before the beginning of the plan year)

• Deemed to satisfy the timing requirement if provided by:
  
  not more than 90 days before the employee becomes eligible, but
  
  not later than the date the employee becomes eligible.
  
  A new plan provides timely notice if it follows the same rule as described above for a newly eligible employee. Thus, a new plan can provide the notice as late as the effective date of the plan.