Establishing a new Safe Harbor

[FJR]

Here is what we are trying to accomplish. Company sponsors a k plan and matches eligible participants. Company wants to carve out most of the employees and start a new SH k plan. Original plan will amended to exclude everyone but factory workers. New Safe Harbor will exclude factory workers and be available to all others. Assets from original plan will be merged to new SH plan for the non factory workers.

If new SH plan goes into effect 4/1/03, but some the deferrals went into the original plan for the first 3 months, how do you do the ADP test for the 2003 plan year assuming both are a calendar year end.

[Mike Preston]

Have you checked out 98-52? I think you will end up with two plans, each of which will have to perform ADP testing on the deferrals received during the year. You may aggregate the two plans for ADP testing is you choose. To the extent HCE's participate in both plans, their compensation and deferrals count in both ADP tests. Whether you use current year testing or prior year testing for the plan that has the 12 month plan year is the same decision you would have made had you not created the second K plan. The testing for the second plan is what I would need to review 98-52 to determine.

[FJR]

Thanks Mike, I will check it out. If testing seperately, we were inclined to use comp. and deferrals only during the time period the participants were in the plan. So eventually, there would be HCE's in the original plan during the first 3 months only. So we would use Comp for only that period. Then test the other plan using comp and deferrals in the other plan for the remaining 9 months?

[Mike Preston]

If you have HCE's participating in both plans, then each of the plans will take into account the deferrals and compensation of the HCE for the entire year. Check out 1.401(k)-1(g)(1)(ii)(B).

[kocak]

I might be reading this wrong, but it seems like you wanted to set up a SH 401(k) in 2003, effective 4/1/03? SH plans need to be 12 months long, unless they are new plans. This sounds like a successor plan to me.

mck

[Mike Preston]

I think the gist of it is that the plan sponsor wants to set up a plan with certain features. Those features are consistent with the SH rules. Recognizing that one can't have a "true" safe harbor because of just what you are mentioning, this discussion is about how to perform the required ADP test for 2003, which of course in a true SH plan there would be no need for!

[FJR]

If the original plan is amended to exclude all the non-factory workers, then they are not eligble under the prior plan. So is it still considered a successor plan even though they are no longer eligible or am I reaching to far? I thought this idea would work as a new Safe Harbor Plan.

[Mike Preston]

I think kocak hit the nail on the head. Neither plan will be SH for 2003. Your SH design will be a SH for 2004, though.