4K Safe Harbor Match Plan Termination

[mschwechter]

Company is sold part way (1/4) through the year (asset sale). Enhanced safe harbor match being made on a payroll-by-payroll basis.

Since deferrals and match both cease at the same time, do I sitll have a safe harbor plan, or do I now need to test since I am ceasing the sh match?

[Tom Poje]

The preamble to the proposed regs would explain the situation as follows

Proposed Regs

An employer can AMEND the plan to eliminate matching contributions with respect to future elective deferrals, provided that the matching contributions are made with respect to pre-amendment elective deferrals, employees are provided with the notice of the change, and the opportunity to change their elections, and the plan satisfies the ADP or ACP test for the plan year using the current year testing method.

Proposed Regs

A plan could have a short plan year in the year the plan terminates, if the plan termination is in connection with a merger or acquisition involving the employer, or the employer incurs a substantial business hardship…

In addition, the plan could have a short plan year if the plan terminates, the employer makes the safe harbor contributions for the short year, employees are provided notice of the change, AND the plan passes the ADP test.

Finally, a plan could have a short plan year if it is preceded and followed by 12-month plan years as a section 401(k) safe harbor plan.

[mschwechter]

So it appears that you are saying that even if the sh match was made for the short plan year due to termination, adp/acp testin gi still needed, right?

[Tom Poje]

that would appear to be the case, which makes sense since the safe harbor is to be 12 months long. (the exception being a short plan year in which you are still ongoing, but have a 12 month before and 12 month after.

In your case, it would prevent Mr Owner from deferring $$$$$$$$$$$$ in the early months and then terminate the plan but still get the free ride on the ADP test. The govt doesn't like that since the rank and file wouldn't be able to defer big $$$$$$$$ in the short period.

[mschwechter]

Thanks, makes more sense now.