freezing a safe harbor 401(k) plan

[R. Butler]

Co. A will be purchased by Co. B in a stock sale on 10/01. We found out today.

Co. A has a 401(k) safe harbor plan. Can they freeze the plan at 09/30 & maintain safe harbor status for the short plan year due to the acquisition? The Co. A employees will become immediately eligible in Co. B’s non-safe harbor plan. Co. A’s plan won’t be terminated because of successor plan questions that just can't be resolved in less than a week; it will just merge into Co. B’s plan at some point.

I'm fairly confident that a safe harbor plan can be terminated mid-year & maintain safe harbor status if the termiantion is due to a business acquisiton, but I do not know that it can merely be frozen and retain safe harbor status.

Thanks in advance for any guidance.

[Kevin C]

Can they freeze the plan at 09/30 & maintain safe harbor status for the short plan year due to the acquisition?

I'd say "No". The Plan Year requirements are in 1.401(k)-3(e). If the plan was terminating 9/30 then you have a chance to stay safe harbor under (e)(4). Otherwise, if it is a SH match, I think you fall under 1.401(k)-3(g), which requires satisfying the ADP test. The corresponding rules applying to the ACP SH are in 1.401(m)-3(f) and (h). If this is a 3% SH plan, make sure you look at the 5/18/2009 proposed regs that list the rules for suspending the 3% SH.