adding profit sharing component to a safe harbor 401(K)

[Guest stephentaft]

We have a prospect who sponsors a safe harbor 401(K) with an enhanced match.

The plan is on a fiscal year ending 10/31/05. Effective 11/1/05, the plan will be amended to a SHNE 3% because the plan is now top heavy; in addition, the client wants the flexibility of a profit sharing contribution, should he decide to make one.

The client was told by his insurance company representatives(who said they thoroughly checked with their Agent Support Team in their Home Office) that he could add a profit sharing component and have the vesting for the new profit sharing component start from the effecitve date of this amendment.

Then the fellow from the Home Office told the Rep that TPAs generally do not like to do this because it requires more work in that the contribution will have to be tracked separately, so TPAs tell their clients that this can not be done becaue they don't want to do the extra work.

I'm about to tell the prospect I have a problem with it because I do not beleive it is legal to do this, not because I do not want to.

Has anyone heard of this approach before?

Steve

[Earl]

No.

The document, pre-amendment, had no vesting schedule? Doubt it.

And if it did, you can ignore it? Doubt it.

[Guest Pensions in Paradise]

stephentaft - you are correct, the insurance company is wrong. Surprise surprise! There are generally only two situations in which you can disregard prior service - (1) prior to the effective date of a new plan or (2) service prior to age 18. In the situation you've described, all service prior to 11/1/05 would count.

Ask the All Knowing Insurance Company to provide you with something in writing which proves that you can exclude prior service. But they won't be able to.

[Guest stephentaft]

And I was beginning to wonder if I had lost some grey matter.

Thank you very much.

Steve

[R. Butler]

They are probably thinking that adding the profit sharing component is equivalent to adopting a separate plan. Without researching this it seems to me that client could adopt a separate profit sharing plan & then exclude years before the plan, as long as client didn't terminate the 401(k) plan within the next 5 years.

If there is anything out there that says adding the component is the equivalent of adopting a new plan I am not aware of it right off. It may be worth asking the insurance rep. for his citations though.