Partnership with a SARSEP changes to S Corp 10/1/03-- okay to adopt 401k plan as of 10/1/03?

[Dave Baker]

(Posted by Dave Baker for Thomas Mulloy, who's having trouble with the message board.)

I went back 3 years on the sep/sarsep/simple board with no luck, so I'll ask

the experts. Situation:

Partnership operates a SARSEP. HCE and NHCE deferred during 2003.

Partnership changes to Sub S Corporation 10/1/03. Business name will change

as will the employer ID number.

Client wants to start safe harbor 401k 10/1/03.

Two questions:

1) Can the s.h. harbor 401k be established 10/1/03 (for a 3 month short plan

year)?

2) They don't want an open enrollment (i.e., anyone employed 10/1/03 enters

the 401k plan). Any problem counting prior service with the partnership and

using it satisfy a 1 year service (and 750 hours worked) eligibility

requirement?

Thanks.

[Gary Lesser]

I believe that prior service can be counted as long as the partnership hadn't terminated under state law AND provisions are made in the plan document. In PLR 8240003, two sole-proprietors (H & W) incorporated their businesses and used that service in a DB plan for purposes of the DB plan's one-year of service requirement.

Deductible SEP contributions reduce the P/S deduction limit. Aggregate limitations under Code Section 402(g) also apply--$12,000/$14,000, 415, and so on. If SARSEP top-heavy, follow provision in SARSEP (as to which plan receives TH contribution).