Calculating non-elective 3% safe harbor contribution for first short plan year

[mariemonroe]

I have just converted a profit-sharing plan to a safe harbor 401(k) plan in the middle of a plan year. The safe harbor 401(k) plan provides for a non-elective 3% contribution based on an employee's compensation for the plan year. The language of the plan implies the compensation taken into account is the employee's compensation for the entire plan year (1/1 - 12/31) even though the plan became a safe harbor 401(k) plan on 6/1.

Has anyone had any experience with this before? What have you advised clients to do in calculating the safe harbor contribution in such a circumstance?

Thanks

[austin3515]

Tough quesiton, and I think you could make 2 different conclusions:

1) The 3% SH is a component of the nonelective portion of the Plan. Therefore the 3% would apply to the full year, because PS (and nonelective) was in place for the full year.

2) Some plan documents are worded that compensation is recognized "while a participant in the portion of the plan for which the definition is being used." Based on this, you could argue that the portion of the Plan is the SH which means that you could use a short plan year. In support of this, it seems illogical to require the 3% SH for a period during which the Safe HArbor relief is not being sought.

If your plan is not explicit, I think you need to choose between the 2 above. Recognize of course that your more apt to need to defend decision 2 then decision 1.

[Tom Poje]

suppose instead of 'adding' a 401k feature to the existing plan, the company had simply put in a new safe harbor 401k plan. in that case it would seem the shnec would only be for that short period of time.

now, recall, that under the regs, for purposes of issuing the safe harbor notice, the 401k is actually treated as a 'new' plan, so I would lean toward applying the SNHEC only for the 'short' plan year.

[Guest HockeyMom]

Since this was originally a profit sharing plan and you are using the 3% SHNEC my first thought here is that the plan is top heavy... If so I believe you would need to use Top Heavy Compensation - which would be for the entire year...