May a Money Purchase Plan be amended & restated to become a Safe H

[Guest PLHart]

Have a client who wishes to amend & restate existing 5% MP Plan into a Safe Harbor 401(k). Is this possible?

[Guest Bill]

Well, yes and no. Yes if it's effective the first day of the next plan year and the participant notices go out at least 30 days prior to that. No, for the rest of this year - you cannot amend a plan to have 401(k) safe harbor provisions for only part of the year. You can start a new 401(k) only plan that is safe harbor in the middle of the year and have a short plan year for it and then merge the two plans at the end of the year but then you have the expense of two plans for this year and the amendment expenses at year end.

[Guest T Hoffman]

Aside from the timing issue Bill mentioned, any future 5% MPP contributions that will be used to satisfy the safeharbor will have to be fully vested, subject to the 401(k) distribution restrictions, and available to all eligible employees (there can be no 1,000 hour or last day of year requirements). Depending upon the demographics of the workforce, these rules can make the prospect of the MPP conversion rather expensive. Also, I would draft the restatement to ensure that the Plan's J&S provisions are only not applicable to the new 401(k) and QNEC contributions, but are limited to the former MPP contribuitons.

[MWeddell]

With an exception for grandfathered arrangements, a money purchase pension plan can't have a qualified cash or deferred arrangement, i.e. 401(k) deferrals. Hence, you'll need to convert it to a profit sharing plan or place the 401(k) deferrals in a separate plan document.

[Guest Dan Ashley]

Yes, but don't do it.

Money purchase plans are tainted by the annuity requirement. Annuities are not required from distributions from proprely drafted 401(k) plans. If you proceed along the lines you are proposing, you will lose the ability to have a nice, clean plan, free of the administrative burden of annuities. Consider costs and benefits of terminating the money purchase plan and permitting employees to rollover to an IRA, or into annuity free accounts within the new 401(k) plan.

[MWeddell]

It's a pure judgment call, but seems to me that the administrative inconvenience of having to preserve annuity forms of payment (when participants seldom elect to take annuities) is outweighed by the cost and hassle of terminating the money purchase plan plus the chance for employees to take complete distributions of the MPPP money during their employment, which is not in the employer's interests.

[Ervin Barham]

I agree with MWeddell. If the M/P is clean from a document standpoint and the admin, then the cost of restating is much less than going through a termination/merger.

You would need to comply with the 15 day 204(h) notice to convert the M/P into a 401(k) plan.