Adding Safe Harbor

[nancy]

If you have an existing profit sharing plan that has a 401(k) feature that has never been used, can you add a Safe Harbor feature midyear concurrent with implementing the salary deferrals. Is this stretching too far?

[R. Butler]

If a 401(k) arrangement is already part of the Plan, than your out of luck until the start of the next Plan year. I don't see as relevant, the fact that the 401(k) provision is not currently being utilized.

[QDROphile]

So does that mean that every prototype plan document that has a CODA option that is not selected is deemed to have a CODA for the purpose of the safe harbor rules? I think it may depend on what "never been used" really means. Or to paraphrase a former President, it depends on what "is" is.

[R. Butler]

Maybe I am a little too conservative, but I am not a fan of the former President and I don't see a shade of gray. The Plan either contains a CODA or it does not.

[QDROphile]

So anyone with a prototype that has an option for a CODA cannot start a safe harbor mid year, end of story?

[R. Butler]

That would be my answer. See Notice 2000-3, Q&A 11.

[Tom Poje]

and the same 'concept' holds true for the 3% first year look back for testing - usually you hear this in regards to the ACP test. If a discretionary match was never mad in prior years, you can't simply use 3% because it is 'the first year' a match was actually made.

[QDROphile]

I guess I will stick to my guns and say it matters what nancy means by "has never been used." The simplest illustration is a prototype plan in which only the employer discretionary contribution feature is elected in the adoption agreement. The plan document has a CODA feature written into it, but the mid year change to the adoption agreement "adds" the CODA feature within the meaning of Notice 2000-3 even though the words were in the document all along.

That is different from a discretionary match in which the employer exercised discretion in a year to contribute $0. The analogy for a CODA would be an active CODA feature under which no participant elected to defer even though they could. That would amount to "never been used" but it has a very different meaning from the prototype feature that had "never been used" because the feature was not active and could not be used because of the limited terms selected in the adoption agreement.

This a matter of interpretation and you are entitled to be conservative. I think Notice 2003 was meant to expand on earlier guidance rather than restrict.

[g8r]

I agree that it depends on what never used means.

If you have a prototype that has an election in the adoption agreement as to whether elective deferrals are pemitted (just like any other employer election that is offered in an adoption agreement), then the CODA is available if the employer has actually selected to permit deferrals.

If the plan permits elective deferrals but no one has used them (which would be suspect as to why no one used them), then I think you have an existing CODA. To me, that would be similar to the plan permitting a discretionary match but the employer has elected to put in $0.

So, I would look at what the provisions of the plan, as adopted by the employer provide.

[R. Butler]

GR8,

I don't necessarily disagree, but are you really saying it depends? You're reasoning doesn't indicate that it depends.

If you have a prototype that has an election in the adoption agreement as to whether elective deferrals are pemitted (just like any other employer election that is offered in an adoption agreement), then the CODA is available if the employer has actually selected to permit deferrals.

If the employer must elect to include the CODA and if the employer does not make that election than there is no CODA. It wouldn't depend because that Plan wouldn't have a 401(k) feature, the employer didn't elect it.

Am I missing something? I am just trying to be clear for my own purposes.

(Actually I have never seen a prototype doing what you suggest. I've seen straight Profit Sharing Plan prototypes and then Profit Sharing prototypes with CODA provisions, but never a Profit prototype with optional CODA provisions. Doesn't mean they don't exist, I've just never seen one.)

[WDIK]

I have seen several "401(k)" prototype adoption agreements where a box much be marked to elect the salary deferral provisions. I think that this is what g8r is referring to.

[R. Butler]

Thanks WDIK. If thats the case than I agree with G8r's analysis. (That is probably what QDROphile was saying too and I just didn't follow the position.)

Having said that the answer does not change. The plan either has a CODA or it does not. If the Plan Sponsor has to specifically elect the CODA in the prototype and the Plan Sponsor did not do so, then the Plan does not have a CODA. If the Plan Sponsor did elect and its just not being used than the Plan has a CODA and Plan Sponsor can only adopt a safe harbor as of start of year.