Safe Harbor Conflict

[Guest kkcfp]

Hi,

Client is on 12/31 year. Two different opinions offered by TPA. Which is correct? Thanks for your help.

My client has TPA and the plan is a profit sharing plan that has a 401k component. The client has had no participating employees in the past and maxed out contributions in past years on the profit sharing contribution and has never contributed via 401k portion.

Client must now cover employees for 2010. Current TPA states the following:

We cannot amend to a safe harbor 401(k) plan for 2010 because Notices have to be given 30 days prior to beginning of plan year. So even if client could defer $16,500 in 2010, the ADP non-discrimination testing would fail and he would likely get most of it refunded. So for 2010, the best plan would be to amend to an integrated formula (which is what this allocation is) and amend to a safe harbor for 2011. Both amendments could be done together by 11/1/10.

A different TPA states the following:

If the client has not used the salary deferrals this year or in the past the plan can be safe harbored for 2010

1. Client and his wife who is employed would defer $16,500

2. All rank and file employees would receive an allocation of the 3% Safe Harbor; Client and his wife would not share in the 3% Safe Harbor Allocation (we need to keep Mrs. out of the 401(a)(4) test)

3. For the Employer Profit Sharing, client would receive the maximum allocation, 2% to rank and file employees and 3% to employees (due to their youth) who worked under 1,000 hours.

4. The amended Plan would say that anyone employed as of 1/1/10 would be eligible for all sources.

[Kevin C]

Since the plan already contains a 401(k) component, the only way the plan can be 3% safe harbor for 2010 is if a "maybe" or conditional 3% safe harbor notice was sent to participants a reasonable period of time before the beginning of the 2010 plan year. Whether or not anyone previously deferred doesn't matter.

Treasury Reg 1.401(k)-3(e)(2) Initial plan year. --A newly established plan (other than a successor plan within the meaning of §1.401(k)-2©(2)(iii)) will not be treated as violating the requirements of this paragraph (e) merely because the plan year is less than 12 months, provided that the plan year is at least 3 months long (or, in the case of a newly established employer that establishes the plan as soon as administratively feasible after the employer comes into existence, a shorter period). Similarly, a cash or deferred arrangement will not fail to satisfy the requirement of this paragraph (e) if it is added to an existing profit sharing, stock bonus, or pre-ERISA money purchase pension plan for the first time during that year provided that --

(i) The plan is not a successor plan; and

(ii) The cash or deferred arrangement is made effective no later than 3 months prior to the end of the plan year.

Does this plan use prior year testing or current year testing for ADP/ACP? When I set up a 401(k) that only covers owners, I use prior year testing so you have time to find out about other participants before they become part of the ADP/ACP testing.

[emmetttrudy]

Cannot change to safe harbor 3% mid-year for an existing plan. this needs to occur as of 1/1/2011.

[Bird]

I agree with prior posters. Can't add SH mid-year to an existing k plan, whether anyone is using the k part or not.

[BG5150]

You DO have elections from all employees stating that they are willfully declining to defer any salary, don't you?

I am always wary of a 401(k) plan with ZERO participation.