401(k) Plan Successor rule

[Guest RACHELP]

An employer has an existing traditional 401(k) Plan in place (no safe harbor, not top heavy, ADP Tests each year) that only allows deferrals and rollover contributions. The employer adopted a brand new 401(k) safe harbor plan, transferred deferrals only from the existing plan to the new plan, and may or may not have allowed participant distributions of the rollover contributions from the existing plan (under the existing plan, distributions of rollover contributions were allowed at any time).

All employees of the employer are covered under both plans.

Has the employer run afoul of the successor rules? Any other rules? Can you carve out the deferral piece in this way?

Can this employer now terminate the traditional existing 401(k) Plan?

I feel like something is wrong with this scenario. I do not know why a new plan would be adopted, as opposed to amending the existing plan.

Thank you.

[QDROphile]

Other than being of generally questionable wisdom, and subject to missing information in your post, the arrangements do not have any obvious flaws except as described in this statement: "may or may not have allowed participant distributions of the rollover contributions from the existing plan." The statement is confusing. Does "rollover contributions from the existing plan" refer to amounts rolled over from the first plan to the new plan? Rollovers cannot be made from the first plan to the new plan because distributions are not allowed from the first plan unless a participant qualified for distribution by termination of employment, for example. Transfers from the first plan to the new plan are permissible as long as the terms of both plan allow it, and transfer of elective contributions only is permissible. On the other hand, the first plan could have distributed amounts rolled over into the first plan from some other eligible retirement plan as long as plan terms provided for it.

MIssing information includes effective dates. The new safe harbor plan should have started January 1 and the first plan should have been amended to cease deferral and contributions as of the prior December 31. It does not work to transfer elective contributions from the first plan was to support the mid-year start of the safe harbor plan by getting elective deferrals from January 1 into the new plan as though deferred under the new plan.

The first plan can be terminated in one sense, but the plan cannot distribute benefits based on the plan termination. The plan would really be frozen rather than terminated.

[Guest RACHELP]

Sorry for the lack of clarity. We are dealing with a lot of unknowns and do not perform administration, so I apologize if the terminology is incorrect. Here goes:

The employer is a group of businesses under common control (and may be an affiliated service group, but that has not been determined). One member of the group sponsors Plan A. Another member of the group sponsors Plan B. All of the employees of the group are employees of the Plan B sponsor (that is, none of the other members in the commonly-controlled group had employees for 2012). All employees of the “employer” are covered under both Plan A and Plan B, as follows:

Plan "A": calendar year traditional 401(k) Plan (deferrals and rollover contributions only) in existence for many years. Not top heavy, traditional ADP/ACP testing, no safe harbor. The Plan accepts rollover contributions and those rollover contributions can be distributed at any time.

Plan "B" (calendar year) was adopted May 1, 2012, with an effective date of January 1, 2012. 401(k) safe harbor (yes they did). Deferrals from Plan A were transferred to Plan B mid-year.

Rollover contributions held in Plan A were not transferred to Plan B.

So, we have a new plan put into place with a safe harbor provision mid-year that is not allowed because this "single employer" already has an existing 401(k) Plan. And this single employer now has two 401(k) Plans for the 2012 plan year. Is this correct?

How does the employer remedy the mid-year adoption safe harbor issue? The third TPA in this case indicates that traditional testing, aggregating both plans is appropriate, but doesn't the employer (meaning the group of commonly controlled businesses) have a document failure and/or operational failure of some kind? I read Plan B's document, and I cannot find any type of "reversion to ADP/ACP test" language in the event that you make a mistake in the timing of adding a safe harbor provision.

Have the participants in Plan B accrued any type of benefit that the employer would be required to make because they held it out to the Plan B participants that it was a safe harbor plan?

Can the rollover contributions be transferred to Plan B? The plan designer had indicated that the rollover contribution could not; is there any statutory reason they cannot?

Thank you for assistance.

[QDROphile]

Tidbit responses that do not address all the issues:

A plan that fails formal requirements for the ADP safe harbor does not get excused from providing the benefits offered by the plan. For example, if the plan provides for a match art a certain rate, the employer must contribute the match. The failure means that the plan does not get the benefits of the safe harbor, such as a pass on the ADP test or on top heavy compliance.

There is no legal reason that a rollover account in Plan A cannot be transferred from Plan A to Plan B as long as both Plans have provisions for the transfer.

The Employer has two plans for 2012 but the elective deferral portion of Plan A may have been merged into Plan B effective January 1, 2012. No comment on whether that means that Plan B is treated as having elective deferrals before May 1, 2012. The documentation might be very interesting. It is possible that Plan A was frozen April 30. It is possible that employees could continue to defer under Plan A after April 30. The document history will tell.