Safe Harbor Mid Year Plan Merger

[PMC]

Controlled group 2 Employers maintaining separate plans. Calendar year plan years. Employer A has a non-Safe Harbor 401(k). Employer B has a Profit Sharing Plan (no (k) feature).

Do you think it's permissible for Employer A to merge it's 401(k) into Employers B's plan and at the same time add the (k) feature and safe harbor to B's plan during the current plan year. It will be done with more than 3 months left in B's plan year?

[ERISAnut]

Let's break this one down.

It would be permissible for the profit sharing only plan to initiate a 401(k) arrangement and applie the safe harbor rules during the plan year since no 401(k) arrangement exists for this employer. Also, it is permissible to two to merge during the year; but why would they do this during the year instead of year end.

So what you are suggesting can be done, but the question is more of a matter of preference. I would initiate a safe harbor arrangement in the PS only plan and then merge the plans at year end. This will provide for a clean transition.

[Kevin C]

What are the active participant counts in Plans A & B? If at least 50% of the eligible employees in the post merger Plan B were eligible employees in Plan A in the prior year, Plan B would be considered a successor plan. Successor plans can not have a short intial plan year and be safe harbor.

Of course, as mentioned, a year end merger is probably the best way to handle this anyway.

1.401(k)-3(e)(2) Initial plan year. --A newly established plan (other than a successor plan within the meaning of §1.401(k)-2©(2)(iii)) will not be treated as violating the requirements of this paragraph (e) merely because the plan year is less than 12 months, provided that the plan year is at least 3 months long (or, in the case of a newly established employer that establishes the plan as soon as administratively feasible after the employer comes into existence, a shorter period). Similarly, a cash or deferred arrangement will not fail to satisfy the requirement of this paragraph (e) if it is added to an existing profit sharing, stock bonus, or pre-ERISA money purchase pension plan for the first time during that year provided that --

(i) The plan is not a successor plan; and

(ii) The cash or deferred arrangement is made effective no later than 3 months prior to the end of the plan year.

1.401(k)-2©(2)(iii) Successor plans. --A plan is a successor plan if 50% or more of the eligible employees for the first plan year were eligible employees under a qualified cash or deferred arrangement maintained by the employer in the prior year. If a plan that is a successor plan uses the prior year testing method for its first plan year, the ADP for the group of NHCEs for the applicable year must be determined under paragraph ©(4) of this section.

[ERISAnut]

A little overkill on this one as there are no employees in the 401(k)/PS arrangement of one employer that are eligible for the PS only plan of the second employer. Hence, the PS only plan could establish a Safe Harbor 401(k) arrangement during the current year. From there, you have two similar Safe Harbor 401(k) plans. That is one transaction.

The question now becomes at what point would you attempt to perform the second transaction; of merging the two plans. While this can be done during the year; It may be much easier and cleaner to do at year end as the balance transfer reported on the final 5500 will be the ending balance of the merged plan.

[Kevin C]

Are you saying the members of a controlled group are not treated as a single employer?

414(b) EMPLOYEES OF CONTROLLED GROUP OF CORPORATIONS. --For purposes of sections 401, 408(k), 408(p), 410, 411, 415, and 416, all employees of all corporations which are members of a controlled group of corporations (within the meaning of section 1563(a), determined without regard to section 1563(a)(4) and (e)(3)©) shall be treated as employed by a single employer. With respect to a plan adopted by more than one such corporation, the applicable limitations provided by section 404(a) shall be determined as if all such employers were a single employer, and allocated to each employer in accordance with regulations prescribed by the Secretary.

[ERISAnut]

Are you saying the members of a controlled group are not treated as a single employer?

414(b) EMPLOYEES OF CONTROLLED GROUP OF CORPORATIONS. --For purposes of sections 401, 408(k), 408(p), 410, 411, 415, and 416, all employees of all corporations which are members of a controlled group of corporations (within the meaning of section 1563(a), determined without regard to section 1563(a)(4) and (e)(3)©) shall be treated as employed by a single employer. With respect to a plan adopted by more than one such corporation, the applicable limitations provided by section 404(a) shall be determined as if all such employers were a single employer, and allocated to each employer in accordance with regulations prescribed by the Secretary.

No, I am merely distinguishing what it means to be an eligible participant in a plan. I am familiar with the Controlled Group Rules of 414(b) and © in addition to the Affiliated Employer rules of 414(m). I am also aware of how the attribution rules of 1563 applies to controlled group determinations while the attribution rules of 318 applies to Afiliated Service Group determinations.

None of those apply to this situation as it is established that the two employers are related. What has also been established is that the participants under the Safe Harbor 401(k) arrangement are not participants under the PS only plan. Hence, the PS only plan does not have a deferral arrangement in plan and the participants under that plan are not eligible for any other CODA with the employer (or related employer). So, the PS only plan can set up a 401(k) feature and apply the safe harbor rules in year 1, irrespective of what the plan of the other "related employer" is doing.

Just breaking it down; that's all.

[Kevin C]

After a merger, both A & B participants would be in the same plan.

[ERISAnut]

Yes, and it would be a merger of two safe harbor plans at that time.

[Guest Pensions in Paradise]

Umm, if you reread the OP the 401(k) is NOT a safe harbor plan. Hence the problem with merging a non-safe harbor 401(k) into a safe harbor 401(k).

[ERISAnut]

Umm, if you reread the OP the 401(k) is NOT a safe harbor plan. Hence the problem with merging a non-safe harbor 401(k) into a safe harbor 401(k).

Good catch! I didn't see the "non-" in front of "Safe Harbor" 401(k). Should have written as 401(k) or ordinary or traditional 401(k). There IS a problem with mergining the two plans during the year.

Man, that was like asking "can I take a deduction on a non-Traditional IRA if I am single and not covered by an employer plan?"

[Kevin C]

It may or may not be a problem merging the plans mid year. Without the participant counts, we don't know for sure.

[PMC]

Thanks all.