401k safe harbor

[Gary]

A plan sponsor had a 401k safe harbor basic match and profit sharing plan for 2009.

They issued the 401k safe harbor basic match notice for 2010.

In August 2010 they implemented a new 401k safe harbor profit sharing successor plan and a db plan.

They intend to terminate the old 401k plan.

It seems that the new 401k plan can not be a safe harbor for 2010 but can be for 2011.

The 2010 safe harbor can only be in connection with the old 401k plan.

Are we in agreement with that?

And finally can the match (which is contributed after the plan year in 2011) now be contributed to the new 401k plan even though it is based on the original 401k safe harbor?

thanks

[austin3515]

Why in the world would you terminate a 401k plan only to start a new 401k plan in the same year? I won;t get into why this won't work until I have a better understanding of what the rationale was.

[Gary]

I think the plan sponsor does not like their current TPA and financial institution they work with and doesn't want to work with them anymore.

And this new plan for 2010 enables them to have a combined plan approach with the DB and 401k DC plan. The plans are to be tested on a combined basis.

Of course my feeling is that they can just use the original 401k safe harbor match plan for 2010 and then use the new 401k safe harbor for 2011 and use the new PS and DB plans for 2010.

Does that make sense?

Thanks.

[austin3515]

No it doesn;t because you can't term a 401k plan and then start a new one in the same year because the distributions wouldn't be eligible for rollover. Plus, you blow your safe harbor for the year, and need to run ADP testing, plus you blow your TH exemption, and need to allocate top-heavys.

And finally, the TPA and the financial institution can both be switched by the Plan.

I cannot think of any reason to pursue this course, whatsoever. Use the 401k plan you already have, you can still do everythign you want to do.

[K2retire]

Nearly every plan that changes service providers is thought by the plan sponsor to be a case like Gary describes. They rarely understand that changing service providers and amending plan provisions does not make it a totally different plan.

[BG5150]

Nearly every plan that changes service providers is thought by the plan sponsor to be a case like Gary describes. They rarely understand that changing service providers and amending plan provisions does not make it a totally different plan.

Or even putting the plan on an entirely new document with the new provider...

[Gary]

So use the 401k/PS plan in place for 2010, and add (since this is what client wants to do) a new DB and 401k (not used in 2010)/PS plan for 2010?

Now, regarding termination of old 401k plan say at end of 2010 or in 2011. My understanding is that the PS assets can be rolled into new plan, but not the 401k assets? When can the 401k assets be rolled over? After employee terminates or reaches 59 1/2?

And finally, what about contributing the safe harbor contributions on behalf of old 401k plan into the new 401k plan trust for 2010? I know that in general safe harbor contributions can be made to the plan that has the CODA or to another DC plan if the other plan has the proper provisions.

thanks

[Bill Presson]

So use the 401k/PS plan in place for 2010, and add (since this is what client wants to do) a new DB and 401k (not used in 2010)/PS plan for 2010?

Now, regarding termination of old 401k plan say at end of 2010 or in 2011. My understanding is that the PS assets can be rolled into new plan, but not the 401k assets? When can the 401k assets be rolled over? After employee terminates or reaches 59 1/2?

And finally, what about contributing the safe harbor contributions on behalf of old 401k plan into the new 401k plan trust for 2010? I know that in general safe harbor contributions can be made to the plan that has the CODA or to another DC plan if the other plan has the proper provisions.

thanks

No that's not what they are saying.

Use the same 401(k) that is in existence. You won't create a new 401(k) plan. Just amend (if necessary) the existing plan, get new service providers and create the db plan.

If the new service providers the sponsor is choosing didn't suggest this, then they are idiots and should not be used.

[Gary]

I appreciate the good comments.

Just from a technical point of view.

If a 401k plan is terminated and a new one is created how do distributions work from the old 401k plan? Are the PS accounts eligible for rollover?

What happens to the 401k accounts?

thank you.

[K2retire]

If you terminate a 401(k) plan, in many cases the IRS will not permit the employer to start a new one until 12 months after the final distribution from the old one.