Safe Harbor 401(k) with 3% Non-elective (not a Maybe)

[msmith]

Client has a Safe Harbor 3% non-elective (not a "maybe") provision. Due to the economy, they want to cease all Employer contributions. Could they:

1. Terminate the Plan (Plan A) during 2009 and contribute only up to the termination date?

2. Adopt a new 401(k) Plan (Plan B) without Safe Harbor provisions?

3. Instead of distributing from Plan A, there will be a Plan to Plan transfer from Plan A to Plan B. Can this be accomplished?

4. Are they violating any participant rights by not allowing distributions from the terminated plan?

5. Would Plan A be subject to an ADP Test for 2009? If so, would aggregation with Plan B be required?

[BG5150]

Because the current plan is obviously a 401(k) plan, you cannot have a successor plan with a 401(k) feature for a minimum of one year after the termination of the original one, I believe.

[msmith]

Is it 1 year after the termination date or final distribution of assets? We would not be distributing assets in this case.

[Belgarath]

1 year after distribution of assets. But you have to give participants the option to receive a distribution if you are actually terminating the plan.

[rcline46]

Then you do NOT terminate the plan per se, start a new plan and immediately merge the old plan into the new plan. That is a de facto termination of the old plan, final 5500, but no distributions.

WOuld not that activity kill the SH contribution?

Interesting that in conferences, the IRS has said you could not START a safe harbor that way.

[msmith]

Any thoughts to:

Adopt a new 401(k) Plan before the old Safe Harbor 401(k) Plan is terminated. If there is a successor plan wouldn't we have to transfer to the new Plan or remain in the old Plan until a distributable event occurs?

[Guest Sieve]

You can start another plan within a year of payout from the terminated 401(k) plan--that's not forbidden. It's just that the establishment of a successor plan (called an "alternative defined contribution plan" under Treas. Reg. Section 1.401(k)-1(d)(4)(i)) negates the distributable event resulting from the plan termination. Therefore, participant distributions are not permitted and all you could do is to keep the plan frozen or transfer assets directly from the old plan into the alternative dc plan (as indicated by msmith in the last post).

[msmith]

Larry:

Are you saying that what I propose is okay?

[Guest Sieve]

I can't say with certainty (there may be somethign that I don't see), but I would think it would be ok--especially if you terminate it & repalce it with a PSP that is not a 401(k) plan. Even so, certainly an employer can have multiple 401(k) plans (look, e.g., at Treas. Reg. Section 1.401(k)-2(a)(3)(ii)(A), which contemplates multiple 401(k) plans with one employer), so I don't know why you can't terminate one and begin another. Form over substance?--sure, but we do those kinds of things all the time. If the plans stand on their own under IRC Section 410(b), why not? Is there a prohibition somewhere?

Did you say that the IRS has stated that you can't have a 401(k) plan in place and then, in mid-year, start a new plan as a 401(k) SH alongside the ongoing 401(k)? On what theory/basis do they say that?

[K2retire]

Wouldn't it be a whole lot easier to just amend the existing plan to cease the safe harbor provision after the required 30 day notice?

[rcline46]

K2retire - There is no provision to stop the 3% Non-elective in the code or regs. This is discussed in many other threads. Inconsistent - yes.