Plan Termination - 3% SHNEC

[KateSmithPA]

Plan is a safe harbor/401(k)/cross tested psp. Plan year is calendar year. 2008 Safe Harbor Notice was provided to participants. Plan is terminated as of 2/29/2008. If I read Sal correctly, and prior posts from a few years ago, the plan must provide the SHNEC through date of termination AND they must also perform ADP test. Finally, their annual additions are limited to 2/12 * 46,000 or 7,666.67.

Is this correct?

Thank you.

[Kevin C]

More information is needed to determine if the plan remains safe harbor for the short 2008 plan year. See 1.401(k)-3(e)(4):

(4) Final plan year. --A plan that terminates during a plan year will not fail to satisfy the requirements of paragraph (e)(1) of this section merely because the final plan year is less than 12 months, provided that the plan satisfies the requirement of this section through the date of termination and either --

(i) The plan would satisfy the requirements of paragraph (g) of this section, treating the termination of the plan as a reduction or suspension of safe harbor matching contributions, other than the requirement that employees have a reasonable opportunity to change their cash or deferred elections and, if applicable, employee contribution elections; or

(ii) The plan termination is in connection with a transaction described in section 410(b)(6)© or the employer incurs a substantial business hardship comparable to a substantial business hardship described in section 412(d).

[KateSmithPA]

Thank you, Kevin.

I do not believe part 1 applies because the safe harbor contribution is the 3% non-elective, not the safe harbor match.

I do not believe part 2 applies because there is no business hardship. Just a doctor group that sold the practice.

I believe both compensation and annual addition limits must be pro-rated to 2/12ths but I was hoping someone would tell me how wrong I am.

Kate

[Kevin C]

Sorry, but you are right about the proration of the limits for the short year.

The other part of (ii) is that the plan termination is in connection with a transaction described in section 410(b)(6)©. Is this the case?

1.410(b)-2(f) Certain acquisitions or dispositions. --Section 410(b)(6)© (relating to certain acquisitions or dispositions) provides a special rule whereby a plan may be treated as satisfying section 410(b) for a limited period of time after an acquisition or disposition if it satisfies section 410(b) (without regard to the special rule) immediately before the acquisition or disposition and there is no significant change in the plan or in the coverage of the plan other than the acquisition or disposition. For purposes of section 410(b)(6)© and this paragraph (f), the terms "acquisition" and "disposition" refer to an asset or stock acquisition, merger, or other similar transaction involving a change in employer of the employees of a trade or business.

[KateSmithPA]

Kevin, again, thank you.

My manager and I did look at that section and came to the conclusion it does not apply in this case. The employees of the plan that is terminating are going to work for another company. The profit sharing plan is not travelling with them, there is no takeover, or merger. We would certainly like the exception to apply so that we could skip the ADP test, but we don't believe it fits.

[katieinny]

I want to resurrect this topic because I also have a client terminating a safe harbor plan before the end of the year. However, in this case, the employer ceased being a sole proprietor, set up a PC as 100% owner in which he hired one person who will likely be an HCE, and also set up another company in which he is a less than 50% owner. The employees were moved from his sole proprietorship to this 3rd company. The owner is taking a break and will not be working for either company he owns.

I don't think this comes under business hardship or merger and acquisition. He wants to terminate the plan as of the date the sole proprietorship ended. I'm wondering if he needs to keep the plan going until the end of the year, although he's already stopped employee deferrals. He should probably make the 3% safe harbor until the end of the year (although I doubt that he will). The one employee in the PC won't meet the eligibility requirements, but the employees in the other company probably come under the affiliated service group rules.