Safe Harbor Discontinuation

[Guest korchnoy]

I am working with thh plan that discontinued SH NEC for year 2007. They use Prior Year testing method. What percentage I should use for ADP & ACP testing, since this is not a brand new plan using Prior Year method. I do not think I will be able to use 3% for Prior Year since this is not a brand new plan. Can someone confirm this please? Do you think I need to test Prior Plan (2006) year (using Current Method) in order to get Prior Year ADP/ACP %'s? Please respond.

[ak2ary]

Aren't safe harbor plans deemed to have elected current year testing?

[Guest korchnoy]

Aren't safe harbor plans deemed to have elected current year testing?

Well, the plan is no longer a Safe Harbor. It was a Safe Harbor through 12/31/06 and became not a Safe Harbor on 1/01/07.

[Kimberly S]

Aren't safe harbor plans deemed to have elected current year testing?

Well, the plan is no longer a Safe Harbor. It was a Safe Harbor through 12/31/06 and became not a Safe Harbor on 1/01/07.

But if they were using current year testing (or deemed to be) through 2006 are they eligible to switch to prior year in 2007? How many years were they current year? Does the amendment taking them out of safe harbor specify they are changing to prior year?

[Tom Poje]

I'd read and reread and read 1.401(k)-2©(1)(i) which says a safe harbor plan is treated as using current year method and then read 1.401(k)-2©(1)(ii)(A) [cant switch to prior year]...unless current year was ..used...for 5 plan years

so the first big question would be how many years has the plan been safe harbor?

[Guest korchnoy]

Thank you for all your responses. I will have to do more digging.

[Guest korchnoy]

Plan has been Safe Harbor since 1999 and was using Prior Year method in 1997 and 1998. When they amended to discontinue Safe Harbor for 2007, Prior Year testing selection was left in the plan document. Safe Harbor automatically deems plan to use Current Year Testing Method, and we are planning to use Current Year testing for 2007. Is there a circumstance under which plan might be forced to use Prior Year method for 2007 (we would have to do 2006 Current testing retroactively). Any suggestions? Thank you.

[Tom Poje]

I'd vote no. since plan was safe harbor that 'implies' it has a 'use current year' provision, even if the document doesn't say that. in fact, the rules for discontinuing a match require the document to use current year, so unless you amend to prior year I think you would have to use current year.

I once asked the document lady at Corbel-land about that - how come even though I chose safe harbor the document said 'use prior year testing', andshe agreed it should really be current year.

but all these comments are my own opinion based on what I understand the rules to be.

part of the problem is the very nature of the beast. If you have a safe harbor, then why would you have language describing what the testing method will be.

last year at the ASPPA conference the IRS personel voiced an opinion if the match was not safe harbor you could indeed use prior year testing for the ACP test (of course depending on what the document says)

[Guest korchnoy]

Thanks Tom. This is how we interpreted this rule too. Really appreciate your feedback!