Does Safe Harbor contribution obligation cease on Plan Termination?

[Guest Dave Danziger]

I've got a calendar year 401(k) plan that is subject to a 3% non-elective Safe Harbor contribution committment. A 50% shareholder is leaving the company. Although the remaining shareholder intends to continue company operations, she wants to scale back on overhead committments as much as possible. Specifically, she'd like to end the company's 3% contribution committment.

It'is my impression that the company cannot revoke a non-elective contribution in the middle of the year. However, if the plan is terminated completely, it would seem the safe harbor committment would have to come to an end.

1. Has anyone seen guidance (or have an opinion) on this question?

2. Do you think there's an advance notice requirement (under ERISA section 204(h), or by parallel to the guidance in Notice 2000-3 - applicable to the halting of Safe Harbor Matching contributions)?

Thank you very much

[Belgarath]

I do agree with what I think you are saying, which is that the safe harbor nonelective contribution can be based only upon compensation up to the date of termination. However, I also think plan termination may bring up another problem: Since the safe harbor is only available if you have a full 12 month plan year, (unless a new plan, etc.) then I think you get thrown back into ADP/ACP testing for the year of termination.

[Guest Dave Danziger]

Your point regarding ADP/ACP is excellent. I had assumed that to be the case because, in the absence of that requirement, HCE's could contribute up to the maximum 402(g) limit on less than a full year's safe harbor contribution.

I also believe there would be a host of successor plan issues if the company adopted another plan within 12 months. I'm not sure the departing shareholder would face these issues if he adopted a plan for his new entity, but I would advise caution.

Do you have a sense that there'd be a 30 day advance notice requirement.

[Belgarath]

No, I don't think so. There isn't any notice requirement for a plan termination on non-pension plans. And as far as any notice specific to the discontinuance of the safe-harbor, even if you took the approach that you must do this for non-elective the same as for a matching safe-harbor, what would the consequences be? You're already dropping out of safe-harbor status for termination year, so it seems like a non-issue. FWIW. One other stray thought crossed my head - what about top heavy? If the plan isn't using 415 comp as a definition of comp, then the 3% might not be sufficient to satisfy top heavy. And since you are dropping out of safe-harbor status, then top heavy would apply.

[Guest Dave Danziger]

The top-heavy issue another great pickup! Thanks very much.