Amend to Safe-harbor 401(k)?

[SMB]

Company currently sponsors a Profit Sharing Plan. As a result of an asset sale as of 05/31/05, all employees - other than the two owners - were terminated (some went to work for the entity that bought this company's assets). The original company remains in business, with two employees - the original owners.

The majority of the terminated participants were terminated late enough in the plan year so that they were credited with more than 500 Hours of Service. Consequently, it would seem that, if the company's two remaining owner participants want to make a PS contribution for 2005, there will obviously be significant "minimum coverage" issues, possibly requiring employer contributions for at least some of the terminated participants sufficient to pass the ratio percentage test (assumes the Plan doesn't pass the ABT).

Query - Any problem with adding a safe-harbor 401(k) provision, using an enhanced 6% match, effective 09/01/05 that would cover only the two remaining owner participants, allowing them to at least make a $14,000 employee salary deferral contribution and receive a 6% safe-harbor match - and forget about making a PS contribution for 2005 due to the coverage issue?

Thanks for any and all responses.

[Leopurrd]

Hi,

Just a thought, but why don't you terminate the PS plan (All employees are 100% vested anyway due to partial term rules) and then start up a new 401k for the company as of 9/1? Then, the owners could roll their ps balances into the 401k AND could possibly max out in profit sharing since they would be the only ones eligible. you also wouldn't have a problem with coverage since only HCE's benefited. (However, you would have a top heavy issue if they hired any new employees.)

I don't think starting a 401k right after terming a ps plan is an issue, only when you term one 401k plan and immediately start another, but i could be wrong. I'd like to have someone else on the board back me up here.....

Also, one thing that worries me is your sentence about selling the "Assets" and all the employees went to work for the other company. I'd be sure you didnt have a controlled group issue before staring work on the plans, if you haven't considered this yet??

You want to act quickly on this though - safe harbors have to be in existence for at least 3 months of the year if its a first year/partial.

Hope this helps!

Vicki

[Guest lakepointe]

Safe Harbor contribution requires a prior notice to employees at least 30 days before it begins and is only available for use in a full 12 month plan period. The only exception is when it is implemented in a brand new plan and must be done prior to October 1.

New Plan would have to be started or the Profit Sharing would have to wait until January 1 to add that option.

There is a notice exception - you can issue a "preliminary notice" prior to the plan year beginning and a final notice prior to year end that you are actually going to contribute.

[Archimage]

lakepointe, that is not correct. You can add the 401(k) and safe harbor provisions as long as they are enacted for a minimum of three months. You have until the date they are first eligible for the safe harbor contributions for the notice. I am assuming this plan in question does not currently have any 401(k) provisions.