3% nonelective contribution issue

[chris]

Calendar year employer to adopt brand new PSP (effective Jan 1, 2001) with safe harbor 401(k) provisions (effective Oct 1, 2001). Employer wants to cover everyone who is employed as of Oct 1, 2001 for both the PSP portion and the safe harbor 401(k) portion. Clearly, nothing wrong with the PSP allocation being based on comp for the plan year (Jan 1 to Dec 31), but can the 3% non-elective safe harbor contribution also be based on comp for the plan year (Jan 1 to Dec 31) or must it be based on comp for the short 3 month plan year (Oct 1 to Dec 31) as you can't have a retroactive 401(k)??

[wmyer]

This question is not answered in 2000-3 or 98-52, but most of the plans we administer which are in this same situation use full-year comp. We give them the option of using full-year or part-year comp.

[chris]

Thanks for the response, WMYER. Is the issue addressed in any commercial research/editorial services (RIA, CCH, etc...)?

[Tom Poje]

from the ERISA Outline Book (2001 edition)

page 11.321 5.c New Plan

The same rules would apply to a new plan....

this refers back to the prior page Compensation taken into account.

The plan may limit compensation to the period of eligibility....see IX.B of IRS Notice 98-52. This rule is not mandatory. the plan may instead determine compensation for the entire plan year...the document will control.

[chris]

Thanks, Tom. Where can I get a copy of the ERISA Outline Book? I have seen that publication cited many times before on the message boards but never thought to ask how to obtain a copy. Thanks again.

[Tom Poje]

try

http://www.aspa.org/educationpages/pubs/ASPApub.htm

or type aspa.org and then select PUBLICATIONS

it is actually 4 books, but an excellent resource

as you noted, in other posts it has been used to answer a lot of questions

[stephen]

The text also comes on CD ROM with a search option. I highly advise this option. If you can afford it you may find it nice to get the text with a CD ROM.

[chris]

This deals more with the drafting of the document, but wouldn't the plan year for the 401(k) portion be Oct 1, 2001 to Dec. 31, 2001? And if that is the case, wouldn't the 3% be based on compensation from Oct 1, 2001 to Dec 31, 2001? Don't get me wrong, I'm not doubting the advice, but I just need to make sure the doc correctly reflects what operationally will happen.

I just looked at Reg.§1.401(k)-1(g)(2) regarding compensation taken into account. I see the language "The period used....must be either the plan year or the calendar year ending within the plan year." Does the calendar year language at the end apply in the case of a short plan year ??? Once again, thanks for your help.

[Guest Dave Danziger]

I know this thread started some time ago, but I wonder whether any one has any further thoughts on this twist:

If a calendar year plan is amended to add a 401(k) feature {and non-elective Safe Harbor election} 10/1/02, can those employees who terminated employment prior to 10/1/02 be denied a Safe Harbor contribution?

It seems to be permissable, as long as the plan amendment specifies that the effective for the k provision is 10/1/02.

Does anyone think the Safe Harbor notice need mention the initial short period?

[Tom Poje]

I would think merely stating 'effective date of the 401(k) is 10/1'

would be sufficient, since you only have to satisfy the safe harbor from the effective date of the 401(k) arrangement.

since the terminees were not there from the effective they would get nothing.

It would be sort of like 'use date of participation'