SH Non-elec plan term

[AlbanyConsultant]

I got a call today from a client who wants to terminate their 401(k) safe harbor [3% non-elective] plan as of 12/31/07. The company is not going out of business; the employees/participants will still be employed on 1/1/08. Everything I can fund says that you have to give notification if it is the safe harbor match that you are eliminating, but nothing specifically speaks to the non-elective contribution.

The plan gave the required notice in November 2007 that they were committing to a 3% plan contribution for 2008. Doesn't that create some sense of obligation on behalf of the participants? Or at least something with respect to the document that it is a safe harbor plan? If we have to run an ADP test for 2008 that's OK because with no one deferring, it can't fail, but isn't there a "bigger" issue here?

Thanks...

[Tom Poje]

I vaguely recall that at one ASPPA conference it was indicated you could follow similar guidelines as for stopping a SHMAC (e.g. 30 days notice, etc), but I am too lazy to look through any notes I have to see if I could find an exact quote. and comments made at such Q and As do not necessarily reflect the actual IRS position, but at least it is a guideline.

[QDROphile]

I recall that if a 3% contribution feature applies, failure to contribute is a qualification failure. You do not resort to ADP testing.

[rcline46]

Rescind the notice, amend the plan prior to 1/1/08. 'Reasonable' notice requirements are in the eye of the beholder and just because 30 days is necessary for match recission does not give rise to the same for the non-elective because it should not affect deferral decisions. I love run-on sentences.

[Tom Poje]

the problem with that is the document says that a 3% contribution will be provided.

thus it acts like a money purchase , and as I recall, you have to give notice and provide a contribution up to that point in time, not simply 'freeze or stop' the money purchase instantly.

[rcline46]

Oh No - This is bad - Tom and I disagree. He probably will never speak to me again. However, the IRS has not seen fit to give us rules on the SH non-elective. Therefore amend it out. One may say it is 'like' a money purchase under 412, but it is not a money purchase plan.

If you are too dissatisfied with the direct solution, start a new 401k, merge the SH into the new one on January 1. That ought to kill the Safe Harbor! The plan no longer exists.

[QDROphile]

I am sorry, I did not read the original post correctly. The employer should not be bound to make any contribution for 2008 as long as plan terms are set by proper action before 2008. Once the plan year starts under terms that include a safe harbor 3% contribution, the employer is bound to make the contributions and cannot resort to testing.

[AlbanyConsultant]

According to the 2007 ERISA Outline Book (Ch 11, Sect XIV, Part I.2.c), the 12/29/04 regulations give us the answer. There are two options, based on whether there is a business transaction or hardship, of which there is neither in this case, so let's stick with Option #1 (2.c.1). See the attached document for a copy of the relevent section.

This seems to imply that if the plan is terminated on 12/31/07, then 2007 is treated as not being a safe harbor year (depending on your reading of "during the plan year", I suppose), so the safe play would be to make the plan termination effective 1/1/08.

And between this and the 1.401(k)-3 regs themselves, only the safe harbor match is noted as requiring a notice for the cessation of the safe harbor contribution. Therefore, I'd conclude that if they'd wanted the non-elective to have a notice requirement as well, it would be somewhere in that section(s). Since it isn't, there's nothing required, the plan has no earned compensation as of 1/1/08 (the new date of termination) so there's nothing to even argue about should there be a 3% contribution on. And I've got a Datair prototype with the neat feature that essentially says that in a year you make the safe harbor contribution, you're a safe harbor plan, and in the years you don't, you're not (the IRS has said that they didn't catch that earlier, so I suspect they'll close that convenient loophole with the EGTRRA restatements!), so there's no worry about amending the plan provisions.

I'm agreeing with rcline. At least, that's the way I see it today. Not the most conservative approach, perhaps... thanks for everyone's input.

2007_ERISA_Outline_Book_Ch_11_Sect_XIV_Part_I.2.c.doc