New S/H 401(k) Plan

[Dougsbpc]

A calendar year company wants to adopt a new Safe Harbor 401(k) plan for the 2009 year. The notice will be considered timely if provided when participants become eligible. The plan document will be signed shortly, Safe Harbor Notices will be given and salary deferral elections will be made all effective March 1, 2009.

Does this preclude the plan from being effective 1/1/2009? In other words does a retroactive effective date automatically mean that the safe harbor notice was not timely?

If we do need to make salary deferrals effective 3/1/2009, are we required to pro-rate the 402(g) limit?

Thanks.

[Guest Sieve]

If this is truly a new plan, and not a successor, then the plan year can be less than 12 months. (Treas. Reg. Section 1.401(k)-3(e)(2).) So, I'd make the effective date March 1, and just have a short 1st plan year (assuming you are not trying to hit the 415 maximum before 12/31/2009). 402(g) is a calendar year limit, and does not need to be pro-rated (but the 415 compensation limit is pro-rated).

What I often do in these circusmtances is establish a plan with a 3/1-2/28 1st plan eyar, and then change to a calendar year as of the 1/1 following the end of the first year: i.e., 3/1/2008-2/28/2009, then 3/1/2009-12/31/2009, then 1/1/2010-12/31/2010.)

[Dougsbpc]

Thanks Sieve

I would think the 415 compensation matter is a not an issue in a safe harbor only 401(k) plan. Even if you had a short year of 4 months it would be $245,000 x 4/12 = $81,666. maximum salary deferrals and 3% of annual compensation would be far less than $81,666.

[Guest Sieve]

But, you could only consider a maximum of 10/12 of $245,000 (for a 3/1 year start), so a NEC safe harbor would be based on 3% of the pro-rated compensation number (i.e., a contribution of $6125 vs. $7350). Same math for the match. That's why I usually use the off-calendar year for the first year (although you'll still have to pro-rate at some time if you use a short initial plan year and then move to a calendar year sometime down the road).

So, if you want to use the full plan year to get the advantage of an unreduced compensation number for each plan year, I think you make the plan effective 1/1/2009 and give the SH notice based on when the employee is "eligible" (as required)--and I'd look to the definition of Eligible Employee (Treas. Reg. Section 1.401(k)-6), where an employee is "eligible" when "diredctly or indirectly eligible to make a cash or deferred election under the plan . . .". I'd say, in a situation where you are not able to start the deferral until March 1, that employees are not eligible until that time (even though, with a 1/1/2009 effective date, they are participants as of 1/1/2009). Some may think this is a loosey-goosey approach--and it certianly would not be my first choice, because it would permit a SH plan to use a full-plan year but only permit deferrals for a portion of the year. Just depends how important the SH contribution $$ are to the HCEs who exceed the pro-rated comensation figures if there's a short plan year.

[Tom Poje]

There is nothing to prevent you from having an effective date of 1/1 - in fact if you plan on making an additional profit sharing contribution, that is probably what you want.

the 401(k) portion of the plan would start 3/1.

remember, you can also use the 3% prior year assumption for NHCEs the first year and then amend to be a safe harbor the following year.