Plan year-end change - notification to participants

[Guest Achilles]

I have a plan that is currently a 2/28 plan year-end.

They will be switching to a 12/31 year-end effective immediately.

What notification, if any, does the plan have to provide to the participants regarding this switch?

Time-frames involved?

Thank you in advance!

[Archimage]

Since you are amending the plan document you need to give participants a Summary of Material Modifications. You have 210 days after the close of the plan year in which the modification is adopted.

[Guest jvanheyde]

If the plan you are describing is a safe harbor 401(k) plan and the switch is from 2/28 to 12/31, and this decision is not made until say 12/5, what is the impact on the 30 day advance safe harbor notice that for a calendar year plan normally would have been given by 12/1. Is a 26 day notice a reasonable notice in light of the facts and circumstances?

[Tom Poje]

as noted in the other thread, I believe you can't have a safe harbor if the plan is an existing 401. remember, you can't have a 401k plan and switch in the middle year to safe harbor, and I believe the same logic applies.

see Notice 98-52

Section X

A plan will fail to satisfy the ADP safe harbor or the ACP safe harbor for a plan year unless (i) the plan year is 12 months long or (ii) in the case of a new plan....

maybe it is not fair, but the regs are still the regs! It appears if the plan 'is/was' safe harbor, you are stuck testing for the short plan year

[AndyH]

Tom or anyone else,

Has anything changed on this? Do you still think that a change in plan year in a safe harbor k plan invalidates the safe harbor status for that year, i.e. makes it subject to ADP/ACP testing?

[KJohnson]

I believe that the IRS in the proposed k regulations made an exception if the short year is the final plan year. ASPA's comments only asked for clarification of what was meant by the "final" plan year. I think that making this exception for a short final year simply solidifies the rule in other contexts-- you can't be safe harbor in a short year (except for the first year for a new (k) arrangement and the final year under the new proposed regs). Here are the ASPA comments:

The proposals provide that a safe harbor plan will continue to qualify under §401(k)(12) and/or §401(m)(11) in a short plan year if the short year is a result of a plan termination. When a plan sponsor terminates a plan, deferrals and other contributions cease at the date of termination but the plan continues to be in effect during the “wind down” process while the plan sponsor finalizes distribution documentation and, perhaps, applies to IRS for a letter of determination with respect to the plan’s termination.

The proposals do not make it clear that the plan’s safe harbor status in the year of termination is not adversely impacted if the plan continues to exist beyond the date of the plan termination. In addition, final regulations should make it clear that safe harbor contribution obligations are met if such contributions are made only with reference to compensation and deferrals during the period for which the plan was active.

ASPA Recommendation: Final rules should clarify that the length of the “final plan year” is determined by reference to the plan’s termination date for purposes of §1.401(k)-3(e)(4). The short plan year rule should relate only to the period the plan is active.

[AndyH]

Thanks for the comments but in the interim somebody told me that the proposed regs would allow for this and that it was in Sal Tripodi's outline, which on page 4 says that a short year safe harbor would be ok if both the preceding and subsequent plan years were 12 month safe harbors. This seems sensible to me.

[KJohnson]

I didn't go back and look at the proposed regs. You may well be right. I only had the ASPA comments sitting on a pile on my desk that addressed the final year issue.

[KJohnson]

Andy H you are right. I went back and looked at the proposed regs(which is always a good idea) and this is from the preamble's explanation:

The proposed regulations would recognize the practical difficulty in a 12-month requirement by following the rule in Notice 98–52 that allowed a short plan year in the first plan year and would allow a short plan year in certain other circumstances. Specifically, a section 401(k) safe harbor plan could have a short plan year in the year the plan terminates, if the plan termination is in connection with a merger or acquisition involving the employer, or the employer incurs a substantial business hardship comparable to a substantial business hardship described in section 412(d). In addition, a section 401(k) safe harbor plan could have a short plan year if the plan terminates, the employer makes the safe harbor contributions for the short year, employees are provided notice of the change, and the plan passes the ADP test. Finally, a safe harbor plan could have a short plan year if it is preceded and followed by 12-month plan years as a section 401(k)

safe harbor plan.

[AndyH]

Thank you.

[Alf]

I didn't think we could rely on the proposed regs yet because they do not include a certain type of special reliance language in the effective date provision. Is this just a theoretical issue? It seems to me that the only precedence that we can rely on says you can't do it, so you run the risk that the IRS could finalize the regs without this provision and we would be stuck.

[KJohnson]

I was just responding to the question of whether there was anything further from the IRS. You are right that the proposed regulations are not in effect and do not promise reliance