SafeHarbor 401(k) feature

[MarZDoates]

Is it too late to install a safe harbor 401(k) plan and still make deferrals in 2002? If we provide notice to participants November 15, can we have deferrals begin December 15? Assuming document is signed before December 31, 2002?

[MWeddell]

Do you already have a qualified plan in place? Does it include a qualified cash or deferred (401(k)) arrangement? When does its plan year end?

[MarZDoates]

At present we have a Profit Sharing Plan with no cash or deferred option. The original effective date was July 1, 1980. We have to restate for GUST and wanted to add safe harbor 401(k) at the same time.

We also wanted to be able to allow for deferrals in 2002.

The plan year ends December 31, 2002.

Thanks for your help.

[Tom Poje]

unless you are in some type of special 'daylight savings time' area, (e.g. fall back a month) you are out of luck.

safe harbor plans have to 'exist' for at least 3 months. you are past the Oct 1 deadline.

Remember the HCEs can defer 5% the first year, so not sure why the safe harbor is so important at this late date.

[maverick]

Tom's right.

Our adoption agreement has an option to make the plan a safe harbor 401k in those years when notice is timely provided. If your a.a. has someting similar, just check that block, and provide the notice now for 2003.

If your HCE's make 200k, they can defer 10k w/o ADP problems.

[Brian Gallagher]

10 k? isn't it 12 for 2003?

[MarZDoates]

Brian, I assume what Maverick was referring to is that HCE can defer 5% of $200,000 ($10,000) in 2002 without the safe harbor? But at this point, I'm not sure about annnnyyyything! And I certainly do NOT know which way I'm going...left, right, wrong or otherwise.

[Brian Gallagher]

my bad. sorry about that. teaches me for just reading the last post, rather than re-reading the whole thing.

don't mind me today. i was up late last nite.

[MarZDoates]

Is it conceivable that the following could be done: 1) amend the current calendar year profit sharing plan to add 401(k) feature effective December 1, 2002. 2) enroll eligible participants and offer them the option of deferring beginning December 1, 2002. (Does it matter what the NHCEs defer?)

Let’s say HCE has wages of $10,000 in December. Could he defer all of it and contribute to the plan. His compensation for the entire year is $200,000 (5% of $200,000 = $10,000), which satisfies the ADP test for the first year. Is it permissible to count compensation for testing purposes for the entire plan/calendar year, even though we don’t add the 401(k) feature until December?

Then amend the plan to add a safe harbor 401(k) feature beginning in January 1, 2003? (Can we do that in the same plan amendment?)

I think you see where we are trying to go with this, maximize the HCE’s contribution at this very late date without disqualifying the plan. Thanks to any or all who care to reply.

[wsp]

So, let me make sure I get this right. If I have a person who comes to me and says "I want to start up a 401(k) Plan for my employees." Because it's after 10/1, it can't be a safe harbor plan, but he and all other HCE's can still contribute up to 5% of his annual compensation without worrying about discrimination issues. So, we would want to start it out as a regular plan, then amend the plan to make it a safe harbor plan effective 1/1/2003? With the original plan whose first plan year will be 12/1/2002-12/31/2002 can I then implement a 100% match to go along with it? Then modify that with the safe harbor amendment?

[Brian Gallagher]

i don't think the intention is to make a new plan, just add 401k to an existing plan

[wsp]

Yes, but mine is a spin off question because it actually happened yesterday. Someone walked in off the street wanting to start a 401(k) plan with safe harbor provisions. I told him it was too late for that but would research other options....The three month rule applies regardless of whether it's an add-on plan or not, correct? So then no new plans after 10/1 period? or can I still utilize the 5% rule for first year plans?

[Tom Poje]

safe harbor plan must be 12 months, unless it is a new plan, then it has to be at least 3 months.

the regs are interesting, it looks like you can't switch plan years and have a safe harbor in the year you switch!

for a new 401(k) plan feature you can always use 3% for the NHCE as a look back year, since there is no look back year.

as for testing comp, the regs say use 414(s) comp. the new Corbel documents definiton is simply any comp that satifies 414s may be used. I have seen some documents that specify comp from date of participation - in fact I think the old Corbel said that as well. So be careful, use the definition permitted by the document - it can be all year or just from the effective date of the 401(k) feature.

unfair? hey the regs are the regs. what if you had a brand new company - calendar year plan, started 7/2/02. immediate eligibility. In 2002, your test has only HCEs -automatically passes. all nhces are otherwise excludable (less than 1 year of service)

in 2003, your test has only HCEs. again, all nhces have not completed 1 year until 7/2/2003 - and you can exclude them from testing until 1/1/2004.

In your case, it is not a new company, so you can't do that, but it is a new 401(k) feature, so you get the 3% for the NHCEs. make sure your document specifies this. remember, a safe harbor plan is deemed to use current year testing - and you can't use the 3% because that is a prior year!

Lets be careful out there how the document describes comp for testing, etc that first year!

[MarZDoates]

WOW! Thanks for all the great feedback. Sounds like I will be able to accomplish my goal as long as my document is properly structured. Thanks again!!!

[KJohnson]

I think you can do this (at least I hope you can because I have done it). Tom's points are well taken. As Tom points out you should make sure you:

1) Have the provision for the 3% first year ADP in your document.

2) For 2002 in order to you use the 3% ADP, prior year testing must also be specified in the document.

3) Make sure your ADP testing provisions take into account an entire year's compensation and not just the compensation atrributbable to periods where an individual was a participant under the CODA.

3) To switch to a safe harbor for 2003 Notices should be given by 12/1.

4), Your Plan should contain the safe harbor provision,

5) Your plan must "switch" to current year testing for 2003 in order to use the safe harbor. (If you continue with safe harbor this should be no big deal, but if you do not you are stuck with current year for five years).

[2muchstress]

WSP - that seems correct to me. However, I believe the key here is that the document must state that for 2002, that plan will use the prior year testing method to pass ADP. Because it is the first year of the 401k plan, and there was no prior NHCE ADP for 2001, then you can assume a prior year ADP of 3% for NHCE's which will effectively limit (or allow) and ADP for HCE's of 5% for 2002.

Again, the key is that you must use prior year testing.