New safe harbor plan for 2009

[Guest Georgia1]

I am writing the new plan document for a start up plan. It will be a safe harbor plan for 2009. I know to make the effective date by 10/1/09, but does the first plan year have to be a short plan year?

[Tom Poje]

no. in fact you can make the effective date of the plan itself 1/1/2009, and the effective date for deferrals 10/1/2009.

[Below Ground]

I typically do as Tom suggests as this make clear issues like limitation year, 415 limits, etc... A big benefit is that any profit sharing can be based on full year compensation. Of course, the situation may call for a short year. This could be related to some concern with respect to eligibility? Anyway, the key element is when are deferral provisions effective.

[Guest AHS527]

Hi:

Using the same situation above with semi annual entry dates.

Let's say I have an employee who met eligibility and entered the plan effective 7/1/2009. However, this employee terminated before the effective date for deferrals (10/1/2009). Plan uses full year comp for all purposes. Does this employee receive the 3% SH even though she was terminated prior to the deferral effective date?

[rcline46]

Now you know why it is bad to use full year pay for all. Also, since a SH plan, don't even think of full year pay for 401(k) purposes. SH should have been effective with the deferral date of 10/1/09, so that person was not eligible.

Plan design when you have multiple sources must be carefully approached.

[Guest AHS527]

So you are saying that since full year comp was used that this person should receive the Safe Harbor contribution?

Just to be clear, the plan was signed with an effective date of 10/1/2009. It was not a profit sharing plan at 1/1/2009 with Safe harbor added 10/1/2009.

I just looked in the doc and there is a place to put a special effective date for the Safe Harbor. If that is left blank is it assumed that the Safe Harbor reverts back to 1/1/2009 even though deferrals did not begin until 10/1/2009?

[Tom Poje]

the regs require a safe harbor to be provided for anyone who is eligible to defer -no allocation conditions.

My own leanings are that someone who quits before deferrals start would be ineligible for safe harbor.

the whole purpose of the safe harbor is you give up running the ADP test because you have provided a special contribution.

of course, that doesn't mean the IRS wouuld interpret it that way...

[Guest Sieve]

Makes no difference when the SH provisions begin. She was never an "eligible NHCE"--i.e., one who was eligible to defer--therefore is not be required to receive a SH contribution (unless the plan is poorly drafted). (See Treas. Reg. Sections 1.401(k)-3(b)(1) & -6 ("eligible NHCE" & eligible employee").)

[rcline46]

In my opinion, yes, the SH is effective 1/1/09.

[Guest AHS527]

Thanks to everyone for their comments. Sounds like this is one of those "gray" areas.......

[Guest Sieve]

rcline -- Assume SH plan is effective 1/1. Also assume that SH provisions say that employer will allocate 3% SH contribution to those eligible to defer. Is this employee entitled to that SH contribution?

[rcline46]

If it were a matching safe harbor, then no. I haven't looked at a document recently to see it the non-elective safe harbor is contingent on being eligible to make a contribution, but I don't remember seeing that in our docs. Would this be prohibited language in that a benefit (other than matching contributions) are now dependent on the deferral? Or is that only if a deferral is made and not eligible for the deferral???

If the language specifically said the SHNEC was dependent on being eligible to make deferrals, and the language was 'approved', then I would agree no safe harbor.

[Guest Sieve]

One example of Plan language that I am familiar with is Corbel's AA, which says (if elected): "The Employer will make a Safe Harbor Nonelective Contribution to the account of each "eligible Participant" in an amount equal to ___% (may not be less than 3%) of the Employee's Compensation for the Plan Year." Eligible participant is then defined in the Basic Plan Document's provisions relating to SH contributions: ""Eligible Participant" means a Participant who is eligible to make Elective Deferrals under the Plan for any part of the Plan Year . . ." And, of course, there are AA provisions allowing compensation to be limited to periods of participation in that part of the plan.

I now see--but have never addressed--the concern re: the SHNEC being contingent on deferrals, and therefore it ought to be prohibited by the regs (1.401(k)-1(e)(6)). But, IRC requires that an NHCE receive the SHNEC if "entitled to participate in the arrangement" (IRC Section 401(k)(12) ©)--and the "arrangement" is the "cash or deferred arrangement" of IRC Section 401(k)(12)(A). So, the statute trumps the regs. Really this is just limiting the definition of compensation for purposes of applying the SHNEC, and the -3(b)(2) regs specifically permit limiting that to "the eligible employee's period of participation".