Safe Harbor

[Guest donl]

Was hoping to get some help on the following plan(s), which seem a bit messy

Client started a Safe Harbor 401(k) plan effective 10/1/11, but didn’t sign plan docs until 12/1/11. Is that an issue? Client has 1 employee, who they notified that they would be starting a Safe Harbor Plan, but never issued a formal notice. Client has made all of the appropriate 2011 non-elective safe harbor contributions and they have issued a formal notice for 2012.

They also have a separate Profit Sharing Plan, effective 1/1/11.

They would like to file a short plan year for the 401(k) so that both plans are on the same fiscal year and then merge the plans together.

No specific question, but hoping for some general feedback as what is best to do with this plan and for this client.

[Lou S.]

Several big problems with the safe harbor for the supposed short PYE 10/1/11 - 12/31/11. The plan isn't effective for 3 months with a sign date of 12/1 since deferal can't start until the plan is executed. Also no formal notice is tantamout to no notice as far as the IRS is concerned.

[MWeddell]

Check out Treas. Reg. 1.401(k)-1(a)(3)(iii)(A).

The 401(k) cash or deferred election may only be made on money that become currently available after the date the plan was adopted, which was 12/1/2011 in your case. In effect, that portion of the plan was effective for only one month, not the minimum of three needed for an initial short plan year for a safe harbor plan. This is not a valid safe harbor plan, which means the employer has not operated the plan in compliance with the plan document.

This is a mess.