Why is there the three month rule for Safe Harbor Plans

[Guest kijiba]

With the Safe Harbor election why is there a 3 month requirement for having the plan in place? The HCE’s who establishes a plan may benefit during the initial plan year by allowing them to with hold the maximum allowable amount. However the alternative is often employers electing a traditional plan with no matching benefit,, therefore, limiting the total benefit of all employees. The overall logic seems counterintuitive since a safe harbor plans still requires a mandatory contribution on behalf of the employee.

[R. Butler]

To be more accurate the plan year must be 12 months, except for a new plan which must be at least 3 months. It is an important distinction because its my understanding anyway that you could not have a short plan year after the initial plan year & still take advantage of the safe harbor.

Why does the intial plan year have to be 3 months? Because IRS Notice 98-52 says so. I'm guessing the IRS is concerned about a new plan being established shortly before year end & effectivey benefitting only a handful of HCE's.

[wmyer]

R. Butler, as you probably know, the proposed 401(k) regs do permit a short plan year Safe Harbor 401(k) as long as the short plan year is flanked by two full plan years. Of course, we can't rely on proposed regs.