Employer terminating profit sharing plan. Adopting Safe Harbor 401(k)

[MarZDoates]

Employer has a profit sharing plan (no 401(k) feature). He wants to terminate effective December 31, 2003. Same employer wants to adopt a new safe harbor 401(k) Plan effective January 1, 2004. Profit Sharing money will be rolled into Safe Harbor 401(k) Plan. Is there any problem with this? What about S/H notice requirement? Thanks for any and all input.

[R. Butler]

Why terminate? Just amend to add the safe harbor 401(k) feature. Make the safe harbor 401(k) feature effective 02/01/04 & avoid the 30 day issue.

[MarZDoates]

Honestly I do not know why employer wants to terminate. Your idea sounds good though. I will bring up that point! Thanks.

[Tom Poje]

If my pea-brain is still working properly, I thought that a new 401-k arrangement (or adding such an arrangement to an existing ps plan) did not require 30-day notice. as long as people are given notice bt the effective date you are ok.

[R. Butler]

Tom Poje,

I initially thought the same thing about the notice & a new plan (& that may be the case), but I looked at IRS Notices 2000-3 & 98-52 & I never saw an exception to the reasonable time rule for new plans. Could have just missed it.

MarZDoates,

If you do amend, be careful to consider how you handle forfeitures if the Plan Sponsor is looking for the top-heavy pass. Although I have not seen any formal guidance, many believe that reallocated forfeitures will kill the top-heavy pass.

[chris]

From 98-52, re the notice issue....

"The requirement that the notice be given within a reasonable period before any year (the timing requirement) is deemed to be satisfied if the notice is given at least 30 days (and no more than 90 days) before the beginning of each plan year to each eligible employee. For employees that first become eligible after the 90th day before the plan year, the notice can be given no more than 90 days before the employee becomes eligible, and no later than the date of eligibility."

See last line.

[Guest jhilliard]

So a profit sharing plan can be amended at any time in their plan year to become a safe harbor 401k plan? I was under the impression it had to happen on the aniversary, and a notice to employees had to be given?

How about this.... can a plan that currently is set up as a PS with deferrals amend the plan to become safe harbor at any time during the year?

Sorry if I am babbling but deep in my mind I am worrying about those last couple things I need to buy like TODAY!!!!

[Mike Preston]

No, a profit sharing plan can NOT be amended at ANY time during the year to become a SH 401(k) plan. You must have at least 90 days left in the plan year to become a safe harbor.

Once a plan is already set up as a k plan then if it isn't safe harbor from the beginning of the year (or, if later, but not later than 90 days before the end of the year, from when it was initially a 401(k) plan) then SH provisions can not be added. Well, that is not a true statement. You can add SH provisions, but it won't be a SH plan!

[Guest jhilliard]

So if the plan is currently a K plan and you add SH provisions during the year, you don't get the benefit (testing free pass) of being a SH plan, correct?

But if the plan is not a K plan (a PS plan) you can amend it during the year (prior to 90 days of the end of the PY) and benefit from the SH provisions?

Thats what I like about pensions, everything is so cut and dry!

[Mike Preston]

Correct.

Correct.

Correct. (g)