401(k) Safe Harbor and the Year-end rush to adopt new plans for '03

[Guest Hilarion]

As usual, now that the year is practically over we have a whole slew of employers that are coming out of the woodwork to sign adoption agreements to establish plans for 2003. But included in the mix are plans that include the 401(k) Safe Harbor feature.

Notice 98-52, section X states: "A plan will fail to satisfy the ADP test safe harbor or the ACP test safe harbor for a plan year unless (i) the plan year is 12 months long or (ii) in the case of the first plan year of a newly established plan (other than a successor plan), the plan year is at least 3 months long (or any shorter period in the case of a newly established employer that establishes the plan as soon as administratively feasible after the employer comes into existence)."

In each of the cases that our marketing department is presenting me with, the plan year is indeed 12 months long.

Can an employer start a 401(k) Safe Harbor plan for 2003 now, at the tail end of 2003? It just doesn't seem right, somehow, but I can't support a "no" answer to marketing.

Please comment?

[WDIK]

How do they plan on getting around the notice requirement?

[Mike Preston]

They can set 'em up. They can even check the box that says it is a safe harbor plan. But it isn't a safe harbor plan in the sense that the ADP test must be run because, well, it isn't a safe harbor plan!

[Guest Hilarion]

But why, Mike? Gots to know to explain it to marketing.

[WDIK]

Sorry to be redundant, but -

How do they plan on getting around the notice requirement?

[Guest Hilarion]

RE the notice requirement. I dunno, I guess they would have to do it ASAP.

[Mike Preston]

What WDIK is saying is that there are requirements to establishing a safe-harbor plan that go beyond checking the box.

Specifically, they must issue a notice and the length of the plan year after which it is turned into a 401(k) must be at least 90 days. There is no way to satisfy either requirement.

As far as the marketers go, just tell them that they need to follow the rules or it isn't a safe harbor plan. Somewhere, compliance should publish what those rules are. You should be able to say to the marketers: "Look at memo such and such. See requirement x? Was that met? See requirement y? Was that met?" If nobody is publishing, then there is a huge disconnect.

[Guest Hilarion]

Thank you, Mike. Just to clarify, though - most of these plans are new, fresh out of the box (actually, they are still in the box). In other words, they are not existing plans that are being amended. Does that make a difference?

[Mike Preston]

Unless a plan is established by 10/1 in a calendar year, it cannot satisfy the criteria set down by the IRS to be a safe-harbor plan. If, on the other hand, the plan year is established as a March 31, then establishing it by 12/31 would work. Not recommended for the faint at heart, though, as off-calendar 401(k) plans can be somewhat of a challenge.

[Alf]

The existing plan/new plan distinction is only important for the 12 month requirement, not the notice requirement.

[Blinky the 3-eyed Fish]

Mike, I am surprised the marketers didn't get a "wow".

[Mike Preston]

Marketers have an assumed, ongoing, continuous and recurring, "Wow!".