Safe Harbor Question

[Archimage]

I have a profit sharing plan that is adding a 401(k) feature effective 10/1. It is my understanding that this can be based on the full plan year's compensation. The attorney is disagreeing with me. Can someone provide me with a cite or tell me I am wrong?

[rcline46]

Its a case of following the bouncing ball.

a '401(k)' is a CODA, Cash or Deferred Arrangement. That means in order to get a tax break, you must defer before you have constructive receipt. That means you have to defer from FUTURE pay only. You cannot take it from your personal checking account.

Therefore, you can (in your case) only defer from pays from 10/1 to end of year.

You imply this will be a Safe Harbor plan, but not whether matching or 3% non-elective. In either case, the match or 3% should be defined (normally) as pay while a participant (eligible). And NO ONE can satisfy this rule prior to 10/1 even if in the Profit SHaring part - so you will have issues with testing pay to confirm the proper Safe Harbor contributions.

Then you will have to watch for Top Heavy issues if applicable.

[Archimage]

I meant to say that is a SHNEC. I have consulted with an ERISA attorney and their position is that it depends on the plan document. It can go either way depending on the document language.

[Harwood]

rcline46: Although deferrals can only start October 1, can compensation take into account the entire year? In other words, if the plan limits deferrals to 10%, can a person do 40% for the last quarter, since it will be 10% for the entire 12 months?

[R. Butler]

rcline46,

Are you saying that in Archimage's situation you can't use full year comp.? Doesn't that depend on how the document defines comp.? It seems to me that if comp. is defined as the calendar year ending within the plan year you can use the full year's comp. (I am assuming that this is a calendar year plan).

[Archimage]

rcline46's statement is the basis for my conclusion regarding full year's compensation.

[R. Butler]

Archimage,

I see your post after rcline's. I agree with with your attorney. It depends on how the plan defines comp. and as I read rcline's post again, rcline probably would agree (although I am just assuming). rcline actually gave a definition of comp. in his post which led to his conclusion.

[Archimage]

I meant to say I agree with you, R. Butler. Too many of you guys with R's at the beginning of your names.

[rcline46]

Of course you can define comp as full year. You even get to do the 3% SHNEC on the full year pay! For the 401(k) portion, why? It only buys the client higher contributions to the employees. Usually.

My point was that REGARDLESS of how you define pay, no one can contribute more than 100% of their pay from 10/1 to 12/31! For example - a person makes $24,000 per year, and wants to defer $12,000. No can do, they only earn $6,000 in the period in question. (Not adjusted for the usual fica, etc).

[EGB]

If the plan defines compensation based on earnings from "date of participation" forward and if an employee became a participant in the profit sharing component on July 1, 2003, what compensation is used for a SHNEC that is effective October 1, 2003? The real question I have is what does a plan mean by "participation" for purposes of the SHNEC when the plan simply says "date of participation" with no specific definition of "participation". Are we talking about any participation in ANY component of the plan (which would mean July 1 for this employee for purposes of both the SHNEC and the profit sharing contributions) or does it mean participation for purposes of each component benefit (which would mean July 1 for profit sharing and October 1 for SHNEC)? I beleive the former makes the most administrative sense and is best supported by the plan's general language. Based on rcline's post, I believe he would say that Oct. 1 applies to the SHNEC. Other thoughts?

[rcline46]

We use the Corbel documents. When date of particpation is chosen, it has language that says participation in the component of the plan being measured. So we have a 415 comp which is full year, a participation comp for the profit sharing from July 1, and a participation comp for the 401k SHNEC from 10/1.

What does your document actually say?

[Archimage]

It is not specific at all. The document is very poorly written. It is a prototype from a large broker dealer.

[QDROphile]

Naive question: If it is a very poorly written document, why still have it?

[Archimage]

Client relationship with the broker, its cheap, and there is no convincing otherwise.