Final 401(k) regs and termination of safe harbor plan

[Lori Foresz]

Not surprisingly, I am confused by the final regs and the exception for the 12-month rule for safe harbor plans in the year a plan terminates.

The plan makes the 3% not the match.

The regs say the plan will not fail to satisfy the requirements for safe harbor if it satisfies the requirements through the date of termination and EITHER 1) treats any suspension of safe harbor matching as a reduction or cessation subject to a 30 day notice requirement or 2) the termination is because of business hardship or transation described in 410(b)(6)©- probably a merger or acquisition.

Can anyone determine what this means for plans that make the 3%. Neither of these would apply if there is no match made. So, either it means 3% plans automatically satisfy 1 or satisfy neither and therefore must provide the 3% for the entire year or lose safe harbor status if it termintes mid-year.

Help!

Thanks

[Tom Poje]

probably the best advice is to read the preamble??????? No, really, I found the preamble a lot better way of understanding what the regs were trying to say. Unfortunately, the preamble to the final regs left out the comments on ACP safe harbor that were in the proposed regs, but your question deals with ADP safe harbor so that shouldn't matter.

anyway, the preamble says

A plan could have a short plan year in the year the plan terminates, provided it is in connection with merger/acquisition or employer incurs financial hardship.

could also have short plan year if it terminates for any other reason if

it makes contributions for the short plan year, ees are notified of change, and plan passes ADP test. employer must make safe harbor contributions through date of termination.

the actual regs say if plan isn't terminating due to merger/acquisition/hardship, then it must satisfy the requirements for suspension of safe harbor match. of course, in this case you are talking athe SHNEC rather than the SHMAC, but if you follow those rules the best you can it looks like you would have to give 30 days notice rather than simply shutting everything down.

[Lori Foresz]

Thanks Tom. I do see that the plan must make the 3% through DOT and pass ADP (the worst case scenario) in the preamble, but strangely, can't seem to find that in the actual section of the regs. Don't know why I'm surprised. Is the fact that the plan must also pass the ADP hidden in the regs? Why can't they write the regs a bit clearer. I still can't determine if a 30 day notice is required for 3% plans or just plans tht provide the safe harbor match. I guess best to provide the 30 day notice just in case. Thanks again

[Tom Poje]

as I said, I 'think' the 30 day notice is implied. all the regs say is that you have you satisfy the rules for a safe harbor match if the plan is terminating for other than merger/hardship.

I could of course be wrong on that, but it seems implied also by the fact that you could have had the plan have the 'optional' SHNEC rather than required - remember the 'optional' SHNEC must be done 30 days before either.

1.401(k)-3(d)(4) speaks of the final plan year. my apologies for not putting that down. I try to include cites whenever possible. my original comments were meant to say something like

"in addition to the regs, it doesn't hurt to read the preamble - sometimes the comments are clearer than the regs."

I have been working on getting some of this in the supplement for the nondisrim answer book, so I have some of the regs readily available:(sorry, the book isn't going to have your situation, as indicated I am not 100% sure on requiring 30 days notice)

A safe harbor 401(k) plan may be amended during the plan year to reduce or eliminate the safe harbor matching contributions provided all the following conditions are met:

1. notice of suspension is provided to all participants (see Q. 12.52.1)

2. reduction or suspension of the matching contributions is effective no earlier than 30 days are eligible participants are provided the suspension notice

3. eligible participants are provided an opportunity to modify their deferral elections (and after tax contribution elections if applicable)

4. the plan is amended to provide that the ADP /ACP test will be satisfied for the entire year and the current year testing method will be used

5. the safe harbor matching contributions have been provided through the effective date of the amendment.

1.401(k)-3(g) and 1.401(m)-3(h)