Safe Harbor and an Annual Match - how to?

[Guest scdgoofy]

My new employer switched their 401(k) plan to a Safe Harbor plan effective January 1, 2007. They are matching 100% of the first 3% of salary and 50% of the second 2% of salary, which meets the Safe Harbor requirement.

Interestingly, they've elected to go with an annual match, which will be calculated and funded in early 2008. I have a couple of questions with regard to this:

1. How do we provide a match for those employees who leave us mid-year and take their money with them? No problem funding their account if it is kept with us, but what happens if they walk and take their money? Do we will have an obligation to fund the match?

2. Disregarding the first question, do we even have an obligation to fund the match for a terminated employee under Safe Harbor? Or can we say "you must be employed on December 31, 2007 to receive an employer match"?

Thanks much!

[Archimage]

Can't have an allocation requirement on the additional match so everyone gets it that deferred.

[Guest scdgoofy]

Can't have an allocation requirement on the additional match so everyone gets it that deferred.

Okay, if we can't have an allocation requirement, back to my original question...

How do we handle a mid-year departure who takes their money with them?

Thanks!

[QDROphile]

Tail distribution.

[Guest scdgoofy]

Tail distribution.

Wow, no offense, but could you guys be any more obtuse? Ten minutes of Googling "tail distribution" and I'm no closer to an answer now than I was earlier.

Please, feel free to talk to me like I'm an idiot, then maybe I'll get somewhere! :-)

Thanks!

[Jim Chad]

A tail distribution, also known as a tag end distribution, refers to a second distribution to pay out a contribution to someone. A second and I think better way to handle this would be to have your document require distributions be delayed until after the next Plan anniversary or eve the second annual Plan year end after seperation from employment.

[Guest scdgoofy]

Jim,

Thanks for response and explanation. A quick followup though... when you propose requiring distributions be delayed until after the next plan anniversary, are you referring to both the employee contribution and the er match?

Can we legally hold a terminated employee's money until the next plan year starts, which, in a worst case scenario could be a year or slightly more based on the distribution date.

Thanks...

[Jim Chad]

Thought you might like a little explanation of why I think it is better to wait until after the Plan anniversary to do the first payout. At yearend many parts of the plan are examined in detail. Even a safe harbor Plan has some testing that needs to be done. Also, when calculating the match, someone will be going over the census data in some detail. There are many kinds of errors they might find. The first one that comes to mind in letting an ineligble employee defer. The second type of error that comes to mind, is one Participant's deferrels going into someone else's account.

Some ideas FWIW (For What It's Worth)

[Blinky the 3-eyed Fish]

Note that switching available distribution dates is a protected benefit that must be preserved at the time of change. If considering a change you may want to make it applicable to prospective plan entrants for ease of adminstration

BTW, you can legally set up a plan to hold money until normal retirement age. That's one reason they call them pension plans.

[Jim Chad]

You may want to take a good look at your document. Many people don't realize that they currently have a provision saying they are required to delay distributions for some period of time. Usually the delay is for employer and employee money, equally. But not always.

Also, as Blinky pointed out, distribution timing is a protected benefit. Make certain you involve someone very knowledgeable if you amend that part of your document.

[Bird]

The other option is to calculate and deposit the match for terminees after they leave but before they take their money.

For the reasons mentioned, I prefer to make participants wait until after the end of the year to get paid. But if the plan already permits immediate payouts you are stuck.

[12AX7]

The other option is to calculate and deposit the match for terminees after they leave but before they take their money.

For the reasons mentioned, I prefer to make participants wait until after the end of the year to get paid. But if the plan already permits immediate payouts you are stuck.