OK to use partial year comp for safe harbor 3% contribution?

[Lynn Campbell]

Client has existing calendar year profit sharing plan - and wants to add 401k provisions mid-year. From reading Notice 2000-3 Q-11, it appears that the client can make the 3% non-elective safe harbor contribution for the 6-month period from 7/1/2003 (amendment effective date) to 12/31/2003 for the first year. Is this correct? Thanks for all input!

[Tom Poje]

my initial guess would have been 'yes', simply because I know I can limit the safe harbor to the period of eligibility, and in this case no one was eligible for 401k deferrals until 7/1. But this rule applies to new plans. I don't think there is any real guidance on a situation in which a plan adds a 401k feature. Q-2 of 2000-3 says I can calculate the contribution on a payroll basis (which would be period of eligibility) but that rule only applies to the match, so I can't rely on that.

The 3% is still a non elective, and you have an existing profit sharing, and therefore people are eligible for the non elective the whole year. so, lets suppose no additional profit sharing has been made for the year. At that point, at the minimum, it would seem I would have to do a(4) testing - I would think that comp for 414(s) purposes would have to be the whole year -

but I could be way off on this one.

[Lynn Campbell]

Tom, do you think the idea that a non 401k plan that amends to include the 401k features is considered a "new Plan" for safe harbor purposes can be used to justify the use of partial year comp in the first year? Or am I stretching here? Thanks very much.

[Tom Poje]

Again, I am guessing at best on this.

We know you can limit comp to period of eligibility.

The 401k arrangement starts 7/1.

If it wasn't a safe harbor, I would test on date of participation (though I guess I could test on total comp.) depends on what the document says. Therefore, I would conclude that the SHNEC from date of participation would satisfy requirements and the plan would pass.

My initial thoughts on a(4) - I was thinking of a safe harbor with a cross testing feature, and normally you would end up testing all contributions, and so therefore, since you have a non-elective contribution you might have to test using full year comp - even if you didn't make any other additional nonelectives.

However, 98-52 VIII B clearly states that SHNECs MAY (emphasis mine) be taken into account to determine if plan satisfies a(4). since this is an option, it wouldn't have to be considered, so therefore I assume no further testing would be needed. Furthermore VIII B states that SHNECs are not subject to the same rules as QNECs (you have to run 2 tests, one with and one without QNECs).

However, VIII also adds SHNECs are subject to the rules applicable to nonelectives under a(4).

So, this poor boy gets confused.

for a(4) I don't run 2 tests like I have to for QNECs.

And it is optional to include the SHNECs in a(4) - yet they are subject to the rules applicable under a(4)!

you gotta love it. I think you pass that - you are treating everyone equally, but there is no actual a(4) test to prove it since it is optional to include the SHNEC in testing.

[austin3515]

My God Tom, how many years have you been doing this stuff?

My goal in pensions is to catch up to you. I wonder sometimes if I'll ever get there...

What do you do? Do you work for a TPA firm?

[Lynn Campbell]

Thanks very much, Tom!!