Latest date to add a 401(k) Feature to a profit sharing plan

[Guest DCquestioner]

Assuming calendar year plan, what is the latest date that a 401(k) feature can be added to an existing profit sharing plan? The 401(k) is not intended to be safe harbor.

[J Simmons]

The last day you can add a non-Safe Harbor 401k feature to a plan? That would be the day you begin taking elective deferrals out of the paychecks of employees and putting them into the plan. You cannot add a 401k feature retroactively.

[Lou S.]

You have to give the employees an effective ability to make salary deferrals. However much lead time before the final payroll to distribute and collect enrollment forms the company needs to do this would be the limiting factor.

[Guest DCquestioner]

So, to have an extreme example. Let's say I put in the plan now, and employees can make their deferrals in the last payroll.

Can I use prior year testing and assume 3% for the NHCEs, so that my owners can defer 5%? It sounds too good to be true, but I'm not sure.

Thanks!

[J Simmons]

I would try to give the NHCEs a realistic opportunity to make deferrals themselves. The HCEs might know now and be able to manipulate their payrolls between now and the end of the year so that they have a large 'bonus' in the last payroll out of which to electively defer the 5% you mention. On the other hand, if you only spring the news on the NHCEs and have the opportunity out of that last payroll, over which they have no practical opportunity to manipulate as your HCEs might, then you could have a discrimination problem due to the timing of your adding the 401k feature. See Treas Reg § 1.401(a)(4)-5.

[Guest DCquestioner]

That's exactly what I needed. Thanks!