Safe Harbor 401(k) - Termination Questions

[waid10]

A client with a safe harbor 401(k) (3% employer nonelective contribution) wants to terminate the plan. I have several questions related to this termination:

1. Can the plan be terminated mid year?

2. If so, is the nonelective contribution made through the termination date? That would seem to violate the 12 month safe harbor rule. Or is the nonelective contribution based on full year compensation? If the nonelective contribution is made through the end of the year, how do you do the termination mid year? Would it be easier to wait until year end?

3. If the termination is done during 2009, does the Plan still have to be restated for EGTRRA? Or can we escape the EGTRRA restatement if we terminate prior to April 30, 2010?

Thanks.

[Guest SWH]

Yes. You can terminate mid-year.

You have to do the 3% contribution through date of termination or if earlier, by amendment.

I haven't had a SH Plan terminate mid year before, but I have had a plan pull out of SH status mid year.

In this instance, the plan had to do ADP testing, even though they had to make the 3% contribution through the date that the amendment went into effect.

Don't know if that is the situation that you have right now or not.

I'm thinking that there are plan documents out there that have been EGTRRA approved, so you would want to restate. Why rely on a "good faith effort" if you can do the restatement and know that you're good?

[BG5150]

I don't think you can stop a SH Non-elective early, before the termination. A SH Match you can, as long as you are paying the match thru the discontinuation date.

[waid10]

I'm thinking that there are plan documents out there that have been EGTRRA approved, so you would want to restate. Why rely on a "good faith effort" if you can do the restatement and know that you're good?

Client is terminating because of economic difficulties. So I am trying to keep fees as low as possible. If I don't need to restate for EGTRRA, it would save them in legal fees.

[Jim Chad]

FWIW Here is an idea. The following reg says that if you do not put in the SHNEC for the whole year you will fail to have a safe harbor plan. So you pick a freeze date at least 30 days out and give a 204(f) notice notifying employees that you are cutting back on benefits. As of the freeze date, allow no more deferrals. Then put in the 3% SHNEC and do ADP testing ASAP, make any corrections needed to pass all tests and then do distributions.

1.401(k)-3

(e) Plan year requirement.

(1) General rule.

Except as provided in this paragraph (e) or in paragraph (f) of this section, a plan will fail to satisfy the requirements of section 401(k)(12) and this section unless plan provisions that satisfy the rules of this section are adopted before the first day of the plan year and remain in effect for an entire 12-month plan year. In addition, except as provided in paragraph (g) of this section, a plan which includes provisions that satisfy the rules of this section will not satisfy the requirements of Sec. 1.401(k)-1(b) if it is amended to change such provisions for that plan year. Moreover, if, as described under paragraph (h)(4) of this section, safe harbor matching or nonelective contributions will be made to another plan for a plan year, provisions under that other plan specifying that the safe harbor contributions will be made and providing that the contributions will be QNECs or QMACs must also be adopted before the first day of that plan year.

Documents: One idea restate for EGTRRA as of a date after the freeze and before termination. Since the Plan will do almost nothing under this document, maybe you can cut the fee. I would.

This is just my thought, FWIW.

[Guest Sieve]

Jim --

I think you mean to refer to a 204(h) Notice (not 204(f)--although there is an IRS 402(f) tax notice). But, as far as I know, 204(h) does not apply to a non-pension plan where the contribution is not required by IRC Section 412, even if the doucment (such as a SH 401(k) plan) requires that the contribution be made. So, you can prospectively eliminate a SH contribution when terminating the plan (except to the extent that it has accrued) without giving 204(h) notice

waid -- I wouldn't freeze the plan--I would just terminate as of X date. I don't see the advantage of a pre-termination freeze, especially since it is the termination that permits the SH NEC to cease mid-year.

There are PPA '06 stand-alone amendments for termianting DC plans that you should be able to get your hands on that will permit the plan to be amended to comply with all appropriate rules/statutes without having to restate, if that's what you want to do.

[waid10]

There are PPA '06 stand-alone amendments for termianting DC plans that you should be able to get your hands on that will permit the plan to be amended to comply with all appropriate rules/statutues without having to resatate, if that's what you want to do.

The Plan currently complies with PPA and EGTRRA, with stand-alone amendments tacked on. But I wasn't sure if the restatement was required in this case (since I will terminate the plan prior to the end of the restatement deadline).

[Guest Sieve]

I don't think restatement is required for a terminating plan (if termination is before the end of the plan's cycle).

[waid10]

So here is what I am thinking:

1. Do the plan termination mid 2009.

2. Pay the 3% non-elective through the date of termination.

3. Perform ADP Test since safe harbor status ends prior to 12-month period.

I still am not sure if I need to do the EGTRRA restatement prior to the termination.

Any thoughts?

[Guest Sieve]

Sounds ok to me. See post #6, last paragraph, re: PPA/EGTRRA.

[KJohnson]

For terminating a plan with a safe harbor NEC (unless you qualify for the substantial business hardship) I think e(1)(i) of the regs send you back to the same procedure in (g) with regad to suspending the safe habor match. Which means you need to 1) give 30 days notice of the termination 2) make the contribution up to the date of the termination, 3) affirmatively amend the plan to provide that current year ADP/ACP testing will apply for the year of termination (I think this requires not just the testing but an actual amendment).

Also I am surprised you already have PPA amendments for an ongoing plan.

I agree that the EGTRRA restatement is not required assuming you are not in the year or your restatement cycle ( and assuming all amendments are in place) But I also agree that if you could generate an EGTRRA document fairly easily it might be advisable.

[Lou S.]

Quick followup on this idea. Since you have to make the 3% non-elective and it is 100% vested, does it count as a QNEC in the ADP test?