Effective date of new 401(k)

[k man]

If an employer wants to adopt a 401(k) plan mid year (no profit sharing or match), can they make the new plan effective january 1 or do they have to make it effective as of the current date?

please include the legal basis. thank you.

[rcline46]

Good question, and the answer is - it doesn't matter. Cannot do 401k deferrals before plan is signed anyway.

However, compensation is critical. If plan defines as only while participant then you lose 1/2 year pay on boss. If effective is 1/1 even tho entry is 7/1 and comp is full year, you get full pay.

Top Heavy is on full year pay regardless.

A short limitation period is only when a plan year changes and is not relevant for the first year. There are other threads on this item.

So... What are you trying to accomplish, what will the half year pays be, and make your choice.

[Tom Poje]

which in effect can make a big difference if you are going to use prior year testing when performing the ADP/ACP test. Obviously, using half year comp will produce twice the number in this first year. But then what if you want to make a profit sharing contribution...you would probably want to base that on full year comp, so, as Mr Cline point out, just exactly what are you trying to accomplish, and let that rule how you write the document.

[k man]

well the purpose of this plan is to allow employees to defer immediately upon employment commencement. the plan will not have a match or a profit sharing plan. thus, i assume the decision would only be relevant to the first year and whether to use full year or actual participation compensation.

[bzorc]

Another minor point to consider is the 5500. If the plan has greater than 100 participants, you are subject to the certified audit requirement, unless the initial year is less than 7 months, at which point you can defer the audit to the second plan year. If cost is a concern, this might make a difference as to when the effective date of the plan is...