Terminate Safe Harbor mid-year?

[wmyer]

We have a client who amended from a standardized profit-sharing plan to a Safe Harbor 401(k) with a SHNEC contribution for 2003. Now, the client has changed her mind and wants to change to a Traditional 401(k) without any required SHNEC contribution for 2003. Is there any way that she can do this? If not, can she terminate the Safe Habor 401(k) with SHNEC mid-year? If she is permitted to terminate the plan mid-year, does she have to give any notice, does she have to satisfy ADP/ACP tests, does she have to fund the non-elective through any particular date, and where is the authority for terminating mid-year, since you are generally not permitted to have a short plan year Safe Harbor?

[Guest Bob K]

IRS Notice 98-52 states, in Section X, that a plan will fail to satisfy the safe harbor if it is less than 12 months long. There is an exception for the first plan year, as long as the first year is 3 months long.

The newly proposed regulations under 401(k) aree very clear that you can have the safe harbor apply in the year that the plan terminates. However, these are only proposed regulations and are not effective until 12 months after they are finalized.

So, it looks to me like you have to test.

Of course, if the notice that was given was one of the "flexible" notices allowed under IRS Notice 2000-3 then you do not have a safe harbor plan until the second notice is given.