An employer gave a safe-harbor notice in August 1999 with a 10/01/99 s

[Guest]

An employer gave the safe-harbor notice in August 1999 with a 10/01/99 start date for 401(k) deferrals. He elects the 3% QNEC safe habor. Can the effective date of the plan be 01/01/99 for regular p/s contrib purposes? If yes, what is the 3% minimum: 3% of 4th quarter comp or 01/01-12/31 comp? Could the HCE defer $10,000 during the fourth quarter, whatever the effective date? Thanks.

[IRC401]

The IRS position as stated last week atr the ALI-ABA program:

The notice must be given in accordance with IRS rules. There is no exception for a plan that adds a 401(k) feature in the middle of a year.

The employer needs to set up a new 401(k) plan and give a timely notice. The employer could merge the 401(k) plan into the profit-sharing plan the following year.

[Guest]

This is new plan. Sorry I didn't make that clear in my question.

[Wessex]

I attended the same ALI-ABA conference, and I think the Service's position was clear that if there were a full plan year for the profit-sharing portion of the plan, you could not use the safe harbor rules for a short plan year with respect to the 401(k) portion of the plan. The Services's posiition appeared to hinge on whether there was a full plan year for at least a portion of the plan, not whether the 401(k) feature was part of a new plan or added to an existing plan.

[Guest]

Please check my scenario in Another Question above. What if effective date is 1/01/99 and the 3% safe-habor contribution is made on full 1999 comp?

[Lynn Campbell]

If you want to start a safe harbor Plan now for 1999, you must use a short Plan Year and the Plan cannot be effective before the short Plan Year began. See Notice 98-52 Section X, which also states that the Short Plan Year must be at least 3 months long except in the case of a newly established employer. So it appears to be too late for 1999...

[Guest]

Couldn't it be agrued that since the effective date of the plan is 1/01/99 and the employer is making the 3% safe-harbor contribution based on full-year comp, we don't have a short plan year?

[KJohnson]

I agree with Wessex based on comments made by the IRS at the Key District conference in Baltimore this past summer.

You could have established a separate 401(k) Plan for a short year of three months or more and then merged the 401(k) Plan with the profit sharing on the following January 1. However, I don't think that that you can add a safe harbor 401(k) portion to an existing profit sharing plan "mid-year." (Some may say that this is form over substance, but it appears to be the IRS's position).

If you take the position that the safe harbor was "effective" the prior January 1 and therefore you did not have a short year, then it would appear that you would have notice problems.