Date by Which New 401(k) Plans can adopt Safe Harbor status for 1999

[Guest David Danziger]

IRS Notice 98-52 makes it clear that 401(k) plans that are in effect and have fiscal years beginning on or before April 1, 1999, must give Safe Harbor notices no later than March 1, 1999, in order to take advantage of 401(k) safe harbor treatment for 1999.

However, is it safe to assume that a new (calendar year) 401(k) plan can be adopted long after March1, and still elect safe harbor status for 1999? (e.g., sponsor adopts a calendar year k plan on November 1, 1999 - this plan can elect safe harbor treatment for 1999 - right?)

How about an existing calendar year plan that was not a k plan until it is amended on November 1, 1999, to add k features. Can this plan elect safe harbor status for all of 1999?

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[Guest T Hoffman]

There are at least two problems with your scenario.

First, November 1 is too late for a calendar year plan to elect safeharbor status unless the sponsor is a new entity. Notice 98-52 provides that a plan will fail the ADP/ACP safe harbors for a plan year unless (i) the plan year is 12 months long or (ii) in the case of the first plan year of a newly established plan, the plan year is at least 3 months long (or, any shorter period in the case of a newly established employer that establishes the plan as soon as administratively feasible after the employer comes into existence). (I assume that this rule prevents any terminating plan from utilizing the safeharbor provisions in its final plan year unless the date of termination is 12/31 - Any thoughts on this one?). These rules use the Notice 98-1 definition of "first plan year" which is the first year a plan provides for elective contributions described in section 1.401(k)-1(g)(3).

Second, CODAs cannot be adopted retroactively. Therefore, an existing plan cannot be amended in November to add a 401(k) feature and have it apply to all of 1999. This rule would be no different under the safeharbor rules.

Finally, remember that, in the year an employee becomes eligible, notices must be provided within a reasonable period before the employee becomes eligible.

[This message has been edited by T Hoffman (edited 02-11-99).]