How Late is Too Late To Adopt a Non-SH 401(k)?

[ERISA1]

A prospect wants to adopt a new 2010 calendar year 401(k) plan effective 1/1/2010. Instead of a Safe Harbor, she would use the first year rule under which she can defer 5% of full year comp. Is anyone aware of a specific citation that says it's too late to implement the plan on December 15, 2010; assuming there is at least one paycheck remaining in the year and notice is given to all employees at least one week prior to the last paycheck?

Thanks & Merry Christmas.

[Guest Sieve]

No limitation on a non-SH 401(k) plan start date.

[GMK]

Could there be any non-discrim issues?

[Guest Sieve]

Could be, for example if everyone doesn't find out about deferrals in time, or if HCEs have large yr-end bonuses or more pay periods remaining, or defintion of comp is discriminatory. Passing ADP isn't the whole story.

[Bill Presson]

And you need to think about how the tests are going to pass in 2011. Probably have to change to current year.

[ERISA1]

Thanks everyone for your posts to this point. I'm left with two thoughts:

1. Low rates of NHCE deferrals in 2010 won't be a problem because we'd be adopting a new plan right now. We can include a safe harbor feature for 2011 because we only need give reasonable advance notice. On a newly adopted plan, reasonable notice couldn't be any sooner than the date of adoption.

2. No one has provided a citation or account of an actual case in which IRS has challenged adoption of a new k feature with only one payroll remaining. That indicates to me that IRS doesn't have a position they feel they can support in court, and therefore, other practitioners are probably still doing this.

I don't mean to 'dis' practioners who play it conservatively. However, I'm inclined to disclose the issue to the client and let her decide. I'm also posting this as a challenge to anyone who might have any written position statement from IRS.

Thank you very much.

[TPAMan]

If your HCE is also a KE you might want to run a Top Heavy calculation. Depending on the demographics of the plan, a 5% HCE contribution could become quite costly.

[Guest Sieve]

ERISA1 --

I would take issue with your Item 2. Just because no one on this board has knowledge of IRS pushback on a late-in-the-year establishment of a 401(k), don't assume that "IRS doesn't have a position they feel they can support . . .". Just don't forget the all-encompassing anti-abuse provisions of Treas. Reg. Section 1.401(k)-1(b)(3). And, few of these disputes--in fact, a very small percentage--go to court. A written "position statement" is not necessary for the IRS to take a position and stick with it.

Yes, giving the client the final say is always the way to go, but only if you give sound advice. And, that's the hard part.

[Bird]

Thanks everyone for your posts to this point. I'm left with two thoughts:

1. Low rates of NHCE deferrals in 2010 won't be a problem because we'd be adopting a new plan right now. We can include a safe harbor feature for 2011 because we only need give reasonable advance notice. On a newly adopted plan, reasonable notice couldn't be any sooner than the date of adoption.

2. No one has provided a citation or account of an actual case in which IRS has challenged adoption of a new k feature with only one payroll remaining. That indicates to me that IRS doesn't have a position they feel they can support in court, and therefore, other practitioners are probably still doing this.

I don't mean to 'dis' practioners who play it conservatively. However, I'm inclined to disclose the issue to the client and let her decide. I'm also posting this as a challenge to anyone who might have any written position statement from IRS.

We've done this and I don't see a problem with it. The top heavy issue noted is worth considering but we're always doing it in conjunction with an employer contribution anyway.