Converting Existing 401(k) to Safe Harbor 401(k) Mid Year - Def. of Su

[Christine Roberts]

My understanding from Notice 2000-3 is that an existing 401(k) plan cannot convert to a safe harbor format in the middle of a plan year, but that the employer can create a "new plan" with a short plan year and institute safe harbor testing, SO LONG AS (a) the short plan year is at least 3 months long, and (B) the new plan is not a "successor plan" as defined in Notice 98-1.

Now, the definition of successor plan in Notice 98-1 is very broad. I thought I recalled a narrower definition of successor plan that required that the predecessor plan and the successor plan have the same plan year.

If this is the case then can't an existing plan with a CODA start a new plan, with a new plan year, and use safe harbor rules for a short plan year of at least 3 months?

[Tom Poje]

good thought, but, Notice 98-52

Section X

A plan will fail to satisfy the ADP safe harbor ....unless

(i) it is 12 months long... or

(ii) in the case of the first plan year of a newly established plan (OTHER THAN A SUCCESSOR PLAN)....

emphasis mine. It cant be done in a successor plan.

[MWeddell]

How about keeping the same plan, but just changing the plan year? For instance, amend the plan year to start June 1 with the safe harbor formula. Distribute your safe harbor notices during the latter half of April. ADP testing is required for the short plan year (5 months if it has been a calendar year plan) and it'll accelerate when the Form 5500, annual audit, etc. are due. You'll permanently have a plan year that begins at an odd time, but that would have been true under the more complicated method you'd proposed.

Seems possible to me if the employer really wants to convert to a safe harbor plan immediately.

[rcline46]

You did not say matching or non-elective. If a matching SH then I totally agree with above, the notice is critical.

However - the notice requirement of at least 30 days is a safe harbor time. If the SH will be non-elective, then I have no problem doing it now (as long as the ENTIRE year is covered) with the December notice. Why would the IRS say a 100% vested contribution not be allowed and make it a vested normal profit sharing contribution???

Note there is no citeable source here, just my interpretation, and I am not an atty.

[Christine Roberts]

Contribution will be a matching safe harbor.

In the case I was asking about the employer will actually switch from a fiscal year ending 8/31 to a calendar year format, with a short plan year of 9/1 - 12/31.

I think with timely notice, it will be ok to introduce matching SH as of 9/1.

[MWeddell]

We're now disagreeing on something that's irrelevant to Christine Roberts, but rcline46's post is contrary to my reading of Q&A 1 of IRS Notice 2000-3. One can give the notice less than 30 days before the plan year begins and argue that the amount of advance notice was still reasonable, but I read the IRS to still require that some kind of safe harbor notice be given before the plan year begins, even for the nonelective safe harbor. At the least, those interested in following rcline46's suggestion should review Q&A 1 of Notice 2000-3.

[Tom Poje]

ERISA Outline Book says if notice is not given timely then the plan is not safe harbor, even if a safe harbor contribution is provided.