First year safe harbor 401(k) - less than 12 months

[Santo Gold]

Employer currently has a SEP, but now wants to stop funding that plan and start up a safe harbor 401k. To do so right now would mean the plan year (they want calendar year) would be less than 12 months. Since the initial plan was a SEP, does that make a s/h 401(k) a successor plan, and therefore we would have to wait until 1/1/2007 to start the s/h 401(k)?

Thanks

[ERISAnut]

No. They do not currently have a 401(k) arrangement in place so this would be their first arrangement. Therefore, they can start it during the year; as long as the initial year is 3 months long.

You would normally be right if the plan currently in place is a 401(k) plan.

[Santo Gold]

Thanks for replying. After some additional research I arrived at that same conclusion.

[Santo Gold]

Just wanted to be clear about 1 thing. If we proceed and start up a 401(k) s/h, the employer indicated that he would like to make the plan effective 1/1/06, with the 401(k) feature effective 7/1/06. If they opt for the 3% non-elective safe harbor, would that 3% be based on 6 months worth of compensation (7/1 - 12/31) or the full 12 months? Also, would the s/h notice would still have to be distributed by 6/1 correct?

Thanks

[BG5150]

I would say check the compensation definition in the plan docs.