Short year 401k Plan

[DP]

Our client has a Safe Harbor 401k Plan with a 5/31 plan year. The client is now wanting to change to a calendar year and run a short plan year for 6/1/01 - 12/31/01.

Can you use the Safe Harbor provisions for a short plan year?

The HCE deferred $8,500 in May 2001. Does this mean his maximum deferral for the short plan year can only be $2,000?

The employer contribution is a cross-tested formula. Am I correct in saying the $35,000 annual limit must be prorated to $20,417 (7 months)?

Thanks for your help.

[Guest Sehrl]

The HCE could only defer an additional $2,000. The 402(g) limit is a calendar year limit regardless of how a plan year runs.

Not sure on your other questions.

[wmyer]

To all three questions: Yes. Additionally, regarding the short plan year, there's a lot more than just the 35,000 limit that needs to be prorated. Hour requirements, maximum compensation limit (170,000), and the SSWB for plans with permitted disparity also need to be prorated.

[John A]

wmyer,

Why do you think the Safe Harbor 401(k) provisions can be used for a short plan year in this case? I know there are exceptions to the full 12-month requirement for the first years that plans will be Safe Harbor 401(k) plans, but where is the exception that allows a plan that has been Safe Harbor for a full plan year, and then changes the plan year, to the full 12-month requirement for the short plan year resulting from the change?

[Guest Tbrown]

My feeling is that the only concern they would have on the short plan year is whether or not a notice was properly issued. In this case, by 3/31. If the notice was issued timely, why wouldn't they be able to use safe harbor for the short year?

Tim

[Guest Chamelnix]

Section X of Notice 98-52 (confirmed by A-11 of Notice 2000-3) states that a safe harbor plan must either

1)have a plan year of 12 months, or

2) be a new plan (or a new 401(k) feature added to an existing plan) with a plan year of at least 3 months (or possibly shorter for a new employer).