Safe Harbor Status for Terminating Plan

[Guest phy401k]

I'm confused, which is not unusual. A company with a safe harbor plan has been acquired and the safe harbor plan will merge into the acquiring company's plan in September. For the period from January 1 through August 31, the plan operated as a safe harbor plan and all contributions were made. The plan will terminated effective August 31st. Do they need an ADP/ACP test for the short plan year? Or is their safe harbor status effective through plan termination?

[ETA Consulting LLC]

Their safe harbor can be effective through termination; one of the exceptions to the rule that safe harbor must be for the 12 month period. I used to think otherwise, but was recently corrected by the member on this board. Don't remember the exact caveats.

Good Luck!

[12AX7]

Theere's some conflicting terms in the OP's question. It appears the plan is to be merged, not terminated. Depending of the type of SH in effect, termination may occur for certain reasons. Plan merger is another beast. Is the surviving plan a SH?

[austin3515]

(4) Final plan year. A plan that terminates during a plan year will not fail to satisfy the requirements of paragraph (e)(1) of this section merely because the final plan year is less than 12 months, provided that the plan satisfies the requirement of this section through the date of termination and either—

(i) The plan would satisfy the requirements of paragraph (g) of this section, treating the termination of the plan as a reduction or suspension of safe harbor matching contributions, other than the requirement that employees have a reasonable opportunity to change their cash or deferred elections and, if applicable, employee contribution elections; or

(ii) The plan termination is in connection with a transaction described in section 410(b)(6)© or the employer incurs a substantial business hardship comparable to a substantial business hardship described in section 412(d).

410(b)(6)© relates to changes in the controlled group, like an acquisition. Therefore, the plan must either finish its 12 month year, or terminate IF THEY SOLD THE STOCK OF THE BUSINESS. If it was an asset sale, I recently learned that it would probalby be OK to simply terminate the plan effective 12/31/2011, since the plan year will still be 12 months, even though there are no employees for the remainder of the year. There is no such thing as a "de facto" termination. But the regs clearly leave no room for reliance on safe harbor in a merger situation.

If it's a stock sale, you might consider puttng of the merger until 1/1.