Out of the PEO

[Guest Mike Schwing]

I have an employer who was part of a PEO. They were a non-elective safe harbor 401(k) plan with the PEO. The plan year was 01-01 to 12-31.

They left the PEO and started a new plan effective 09-01-02. They are going to transfer the assets from the PEO plan to the new plan.

For the safe harbor non-elective, wouldn't the 3% non-elective contribution be based on compensation for the full year 2002?

They also are using New Comp. and want to make a 2002 profit sharing allocation. I'm thinking they can only recognize compensaiton for the period 09-01-2002 thru 12-31-02 as the new plan is set up this way. When testing the New Comp I also assume I can only use the safe harbor non-elective for the period 09-01-02 to 12-31-02 as the offset to the New Comp.

Is my thinking correct or am I missing something?

[alanm]

I think you are missing something. Skipping from PEO to PEO and adopting plans is nothing more than restatement of an on going plan as far as the client company is concerned. Full years comp should be used and both plans aggregated when testing is done and profit sharing is allocated.

[alanm]

I might add, the only problem is how to account for the contribution. Technically, part of the year's contribution belongs in the first plan but will actually be made into the new PEO plan based upon aggregate testing. You will have to provide the aggregate test to the new PEO TPA in order to pass the plan audit and justify your deduction. You should also provide evidence to the old TPA that the 3% safe harbor contribution was made in the other plan.