Plan Year Change to have Safe Harbor Plan

[Guest dstran]

Have a client who has decided they would like to become a Safe Harbor plan in order to avoid ADP/ACP testing. With the 30 day notice requirement- I am assuming it is too late for 2006. What if the client changed their plan year from a 12/31 to a 3/31 so they could move to a SH plan 4/1 and have time to get the notice out. can that be done and what other implications might this have (other than the traditional short plan year things)? thanks.

[Tom Poje]

Depeneding on how bad the test fails, it would probably be easier to amend plan (if necessary) provide a QNEC to NHCEs only for the current year. you might be able to get by on less than 3%. the only disadvantage is that the HCEs wont get, but that would be for this year only. then amend to safe harbor.

[MWeddell]

I have helped a client do what you propose. Client had a calendar plan year, then switched to a 4/1 - 3/31 plan year with safe harbor provisions. You can then have a short plan year for 4/1/07 - 12/31/07, switching back to the calendar plan year, if the client will commit to maintaining the safe harbor plan design through 12/31/08.

You'll need an SMM for the change in plan year, but presumably that'll be needed for other purposes any way. Data needs to be gathered on the 4/1 to 3/31 basis. There'll be an extra Form 5500 to file and the expense of an extra audit (if the plan has > 100 participants) due to the shifting plan year. If the 1000 hours method of vesting service is used and if you have any employer contributions that aren't fully vested, there'll be some ramifications there.