Merging SH 401(k) and non-SH 401(k) mid year

[lexi]

An employer maintains two separate plans: a SH 401(k) plan and a 401(k) plan. In July, the employer is going to merger the two plans.

What does the contribution rate become starting July 1? (Can one merge a SH plan before the end of its plan year?)

I haven't been able to find any IRS guidance.

[Tom Poje]

ignoring the fact of the merge, the regs are clear you can't take an existing 401k and turn it into a safe harbor mid year or for any portion of the year. the safe harbor has to be 12 months long (exceptions of course for short plans years) the regs are also clear you can not aggregate a safe harbor with a non safe harbor 401k.

I would conclude (perhaps incorrectly) that you can not merge 2 such plans except at the start of the year.

[PMC]

Why couldn't they merge the non-Safe Harbor 401(k) into the Safe Harbor 401(k)?

[Tom Poje]

again, there is no formal guidance in this area. best I can come up with is the following:

though there is a note in the ERISA Outline Book that a merged plan is a 'sucessor' plan (11.407 2006 Edition) and initial plan year of safe harbor plan can't be a successor plan. Now, it is true that it is not a new plan, well, except for some of the folks sort of.

11.538 says if two (safe harbor) plans merge with different plan years then one would have to be treated as having its plan year end as of date of merger. this creates a short plan year for testing purposes, and that kills the safe harbor.

11.402 says if two 401(k) plans (non safe harbor) merged with same plan year then test plans as single plan for the entire plan year. but if you do that, you are now combining a safe harbor with a non safe harbor and that kills the safe harbor.

[PMC]

What if the non-safe harbor plan is amended/"frozen" as of 6-30-07 (ADP/ACP tests to be done) and the safe harbor plan is amended as of 7-1 to let those who were participants in the non-safe harbor plan in the safe harbor plan and then merge the plans as of 1-1-08 (assuming the plan year is the calendar year for both).