Coversion to Safe Harbor

[Guest Dave Peckham]

Suppose you have a profit sharing plan with a 12/31/04 year end. Also, suppose the employer made 10% of pay profit sharing contributions (for the 2004 year) to all eligible participants by 7/31/04. The employer wants to convert the plan to a safe harbor 401(k) plan by 9/15/04. If safe harbor notices are provided to employees prior to 9/30/04, can we rely on safe harbor treatment for the 2004 year?

Thanks much.

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How can you provide a 10% contribution for the plan year when you don't even know what your compensation figures will be for the year?

You cannot convert to a safe harbor plan as of 9-15 if you plan on having your notices out by 9/30. You will have to get your notices out before the effective date of the change and your safe harbor 401(k) provisions will have to be in effect for at least 3 months.

[Guest Dave Peckham]

Actually, they pre-funded the profit sharing contribution based on expected salary at year end. Any adjustments would be made just after year end.

Suppose the notices went out 9/15/04. Could we then make the safe harbor provisions effective 12/16/04? If so, could an HCE make a $13,000 salary deferral during the last pay period of the year?

Thanks

[Guest Wendy Blinn]

The Safe Harbor provisions could not be effective 12/16/04 because the Safe Harbor provisions have to be in effect for 3 months the first plan year. You could establish the Safe Harbor plan on October 1, 2004 and the notices could be given out on September 1, 2004 up until October 1, 2004. If the notice is given less than 30 days before the effective date of the 401(k) arrangement employees must have at least 30 days after they receive the notice to make deferral elections.

The compensation that is used will be based on what is stated in the plan and also may be limited if there is any type of plan limit for deferrals. It is possible that a highly compensated individual can put in the full $13,000 for the last three months of the plan year.