Can an Exsisting Profit Sharing Plan Amend to a Safe Harbor 401(k) or

[Guest Arch]

I currently have a client who wishes to amend a regular Profit Sharing Plan to a Safe Harbor 401(k) plan. Since we missed the March deadline for the notice, could we still amend the plan because it never had a 401(k) provision? What about an existing 401(k)? Can you still amend them later in the year provided the plan year is at least 3 months. Would I have to amend the plan year and create chort plan years to accomplish my task? I would appreciate any feedback.

[Guest AL Minton]

You can take an existing PS Plan that does NOT currently have a CODA feature & add the CODA as a safe harbor 401(k).

The requirements for this are the same as the requirements for a new 401(k) Safe harbor. That means participants must have a minimum of 30 days to review notice and decide contribution level.

All this means if you have a calendar year PS and you want to add 4k feature, you should make 4k feature effective April 30th and distribute notice by March 31st.

Remember, compensation used for "regular" profit sharing compensation must be the compensation used for the safe harbor contribution.

See IRS Notice 98-52.

[Guest AL Minton]

Oops - Forget to completely answer your question...

If the 401(k) feature is "new" to an existing PSP, the IRS views this as a "new" Plan and the Safe Harbor 401(k) may have a short plan year as long as the plan year is a minimum of 3 months long.

[david shipp]

Al,

Can you share where the IRS made this view known (and who the spokesperson was?)

Some are argueing that the interaction of two 98-52 requirements effectively preclude EXISTING PS plans from adding a 401(k) feature mid-year on a safe harbor basis.

Section V(A) says the plan must satisfy the safe harbor contribution requirement for the entire plan year and Section XI(B) says you can't add a 401(k) feature retroactively. You can parse through the words and build a case for both sides.

Any light you can shed on IRS comments would be helpful

[Guest Phil L]

Upon reading the timing requirements of IRS Notice 98-52, it is clear that employers have to provide the notice prior to the beginning of the plan year or, in the year in which an employee first becomes eligible, within a REASONABLE PERIOD BEOFRE THE EMPLOYEE BECOMES ELIGIBLE. The point to be made is that the issue of whether the notice satisfies the timing requirment is a facts and circumstances test.

For example, assume an employer completes the 12/31/98 PYE testing in early March of 1999 and now wishes to add the 3% nonelective safe harbor contribution for 1999. The employer gives the eligible participants the notice in April and advises them that they will receive the safe harbor contribution in the amount of 3% of gross pay for the entire 1999 year. You could make a very compelling arguement that the notice satisfied the timing requirement and here is why. First, there is no absolute deadline; it is a facts and circumstances test. The IRS has stated that they are concerned that employers give the employees an opportunity to alter their salary deferral elections, if necessary, to take full advantage of the safe harbor matching contributions. However, if the employer provides the 3% nonelective safe harbor contribution, it simply doesn't matter whether the employee defers anything at all. There is no action the employee can take that will effect (affect? rats, I always get those mixed up) the amount that will be contributed to his account.

In any event, I know there are some plans that have taken this position and are adopting the 3% safe harbor feature in mid year (but not the safe harbor match).

Has anyone else heard of this approach?

[david shipp]

The following is from Sal Tripodi's WEB site (via BenefitsLink - What's New). It appears that the IRS is not buying the argument that 410(B) plan disaggregation for 401(k)/(m) plans means that a (k) feature started mid-year in an existing plan can be treated as a new plan for purposes of the requirements of Notice 98-52.

The fact that the desired result can be obtained by establishing a separate, new 401(k) plan mid-year and then merging the plans at the beginning of the next year is a classic case of form over substance.

------------------

When can a safe harbor 401(k) arrangement be added to an existing non-401(k) plan?

Consider the following example. A company maintains a profit sharing plan with a December 31 plan year. Effective July 1, 1999, the employer would like to start a 401(k) arrangement and wants to take advantage of the ADP safe harbor rules under section 401(k)(12) of the tax code and explained in IRS Notice 98-52. Can the employer simply amend the existing profit sharing plan to add a 401(k) arrangement effective July 1, 1999, and have the plan rely on the ADP safe harbor for the plan year ending December 31, 1999?

IRS National Office unfortunately says NO, according to a internal memorandum. The added 401(k) feature would be subject to the ADP test for the 1999 plan year, but could be converted to a safe harbor 401(k) plan as of first day of the next plan year - January 1, 2000. If the employer wants to start a safe harbor 401(k) plan effective July 1, 1999, it must adopt a separate plan with a short plan year which starts July 1, 1999, and ends December 31, 1999. The two plans could then be merged effective January 1, 2000.

The IRS is taking this position because Notice 98-52 requires the plan year of a safe harbor plan to be 12 months unless it is a new plan. Furthermore, notice to employees must be given no later than 30 days before the first day of the plan year (with the exception of the March 1, 1999, transition rule prescribed by Notice 98-52). It seems like an unnecessarily narrow position, but if the employer in this example wants to add a safe harbor 401(k) arrangement during 1999 it will need to take the separate plan approach. Note that the new plan would not have to reflect all the safe harbor rules, so long as the written notice is given to employees by the first day of the first plan year and the conforming amendments are adopted within the GUST remedial amendment period.

[Guest LMalone]

What about a calendar year PSP (no CODA yet) and now, January 6, before the first payroll of the year 2000, the client wishes to add a safe harbor 401(k) feature. Would the fact that this is the first payroll of the year permit us to add the safe harbor for the year 2000, provided we give all participants the Notice on or before day they make their election?

We are trying to avoid having a second plan and ultimate merger of the plans.

Any thoughts?

[AndyH]

Jim Holland said at the IRS Q&A session at ASPA (10/99) that conversion of a PS plan into a safe harbor K plan mid year is NOT permitted under current guidance, but that it will be allowed, retroactively to 1999. He indicated that guidance would be forthcoming. I have not yet seen it.

P.S. He also said that doing this through a second (new) plan is ok, i.e. then merging.

[This message has been edited by AndyH (edited 01-06-2000).]

[KJohnson]

LMalone--Earlier in the week I would have said that you are out of luck because of the notice requirements.

I have not reviewed it completely, but IRS Notice 2000-3 has just allowed plans that are using 401(k) safe harbor for the first time in 2000 until May 1 to send the Notice. Also 401(k) can now be added to PS mid-year and notice can be geared from when (k) feature is added.

[This message has been edited by KJohnson (edited 01-07-2000).]

[thepensionmaven]

Similar situation, but now in 2020.

Client sponsors both a csh balance DB and a PSP (no elective deferrals).  Top heavy being met by 5% contribution in the PSP.  As usual, the owners and family want more of a contribution geared toward themselves.  Without numbers crunching, what follows does not seem feasible or practical.  However, many of the participants are older than the principals.

As we all know, the employer has until the due-date of their company tax return to adopt a new plan for the prior year.

Being August already, I do not believe the existing the PSP can add a 401(k) provision, with the notice reqts, etc.

Of course, the family will be the only 401(k) deferrers.

As that is the case, the broker mentioned adding a new plan for 2020 to which, of course only the family members will defer.  Again, any notice requirement would be blown.  They could, I believe, establish a safe harbor 401(k) for 2020; give notices immediately as long as done by 9/30 and then use the full years' W-2, which we are doing anyway.

BUT, now we have 3 plans (albeit 3 admin fees plus new doc plus amending the other 2 docs), which is a nice fee, but a waste of time, since this scenario will not work.

I do not believe, but could of course be incorrect, the safe harbor would still be met, only now by the 3% non-elective plus a 2% PS contribution.  This is the same as is provided currently except the 3% now would need to be 100% vested. so why bother.

Additionally, we have 401(a)(4) and 401(a)(26), so nothing has changed - except with the addition of the 401(k), each component needs to be tested separately, the DB separately tested, then combined testing.

I don't see how this can be anything but an exercise in futility or am I off base?

 

[Bill Presson]

1 hour ago, thepensionmaven said:

Similar situation, but now in 2020.

Client sponsors both a csh balance DB and a PSP (no elective deferrals).  Top heavy being met by 5% contribution in the PSP.  As usual, the owners and family want more of a contribution geared toward themselves.  Without numbers crunching, what follows does not seem feasible or practical.  However, many of the participants are older than the principals.

As we all know, the employer has until the due-date of their company tax return to adopt a new plan for the prior year.

Being August already, I do not believe the existing the PSP can add a 401(k) provision, with the notice reqts, etc.

Of course, the family will be the only 401(k) deferrers.

As that is the case, the broker mentioned adding a new plan for 2020 to which, of course only the family members will defer.  Again, any notice requirement would be blown.  They could, I believe, establish a safe harbor 401(k) for 2020; give notices immediately as long as done by 9/30 and then use the full years' W-2, which we are doing anyway.

BUT, now we have 3 plans (albeit 3 admin fees plus new doc plus amending the other 2 docs), which is a nice fee, but a waste of time, since this scenario will not work.

I do not believe, but could of course be incorrect, the safe harbor would still be met, only now by the 3% non-elective plus a 2% PS contribution.  This is the same as is provided currently except the 3% now would need to be 100% vested. so why bother.

Additionally, we have 401(a)(4) and 401(a)(26), so nothing has changed - except with the addition of the 401(k), each component needs to be tested separately, the DB separately tested, then combined testing.

I don't see how this can be anything but an exercise in futility or am I off base?

 

There is no way to add a 401(k) for 2020. One cannot defer from compensation already earned. Only DB/CB and PS plans can be created retroactively under the SECURE Act.

[Mike Preston]

Extremely pedantic comment: MP also.

[C. B. Zeller]

Wow, talk about thread necromancy. I was a senior in high school when this thread was posted. This thread is almost as old as some of the people working at my company.

I agree with Bill, you can never add deferrals retroactively. They could add deferrals for 2021. As long as the deferral feature is effective no later than 10/1/2021, they can also be safe harbor for 2021.

If you want to talk about testing options, I would recommend making a new post with more details in either the DB forum or the testing forum.

[RatherBeGolfing]

5 minutes ago, C. B. Zeller said:

Wow, talk about thread necromancy. I was a senior in high school when this thread was posted.

HA, Me too!

I have never understood piggybacking a thread from a few years ago (or 20!) with "same, but different facts...." instead of just starting a new post.

[Mike Preston]

I think it's meant by the poster to say something like "See, I did my research and couldn't quite find the answer."

[RatherBeGolfing]

2 hours ago, Mike Preston said:

I think it's meant by the poster to say something like "See, I did my research and couldn't quite find the answer."

Fair enough