Plan Effective Date

[mming]

Client wants to establish a new 401(k) plan with a matching contribution and a profit sharing option. Deferrals would begin in 2008 but he would like to make a profit sharing contribution for 2007. Would it be acceptable to have the plan's effective date be 1/1/07 even though the doc won't be signed until the end of the year? In other words, can the adoption date be later than the plan entry dates (1/1/07 and 7/1/07) even if all of the employees have been asked on several occasions over the past year and have indicated that they would not defer given the chance? The opportunity for a match was explained to them. He and the few employees he has would all be eligible for a 2007 PS allocation.

Although it can't be considered a safe harbor plan for 2007 since a SH notice wasn't issued, could the plan be considered safe harbor for 2008 if it's drafted effective 1/1/07 to contain a regular matching contribution provision in the same amount as a safe harbor contribution, and a 2008 safe harbor notice is currenlty issued? Can this work without a safe harbor amendment since there weren't any deferrals for 2007?

[Blinky the 3-eyed Fish]

The solution is to make the plan effective 1/1/07 and the 401(k) portion of the plan effective 1/1/08.

[John Feldt ERPA CPC QPA]

Since it's the first year for this 401(k) plan, why not allow deferrals for the last little bit of 2007? Elect to use the prior year method for 2007, which gives you 3% for the NHCE's prior year ADP, thus allowing your HCEs the option to get 5% avg deferrals for '07. If your HCE makes $225,000, hey, that's $11,250 assuming they will be paid that much for 2007 after the date you adopt the plan and before 12/31/2007. If they are catch-up eligible, then you could get them another $5,000 in deferrals too. Just be careful about the special effective dates, and that should work fine.

[austin3515]

Two words of caution for you:

Top Heavy.

In the first year of the Plan, the TH ratio is determined as of the last day of that Plan Year. So if you're not extremely careful, you could wind up giving 3% of pay to everyone!!

Not to say this can't be done, but in "micro" plans, you need to be extremely careful, particularly if the 401(k) is rolled out, say on December 15. 2007

[John Feldt ERPA CPC QPA]

Yep.

The PS piece should designed to cover that, with an explanation to the client that the 3% will be a basic minimum PS in 2007. So, if designed properly, TH is easily handled as well. Especially if they have already been thinking about the 3% SH contribution, then the 3% TH contribution sounds doable (especially with vesting) - just different alphabet letters, right?