New Profit Sharing Plan to avoid amending SH Plan

[Rai401k]

So we have a safe harbor matching 401k plan with discretionary profit sharing language.

Client has been funding the safe harbor match for year and never utilized the profit sharing until now.

The current profit sharing provision state the allocation is comp to comp, no last day rule.

Of course they want to fund a profit sharing but do not want to do a % of comp and do not want to fund to terminated employees for 2013.

No way we can amend this document 1 - it's safe harbor and 2 - participant have already accrued the benefit of the profit sharing.

So that's that. HOWEVER we read somewhere that one way of solving this problem is to start a new profit sharing plan for the year. (no 401k provision)

Has anyone done something like this?

Client is really insistent about putting in this contribution for 2013 and not giving it to term as well as doing a per capita allocation.

[ETA Consulting LLC]

Well, there is a cost-benefit to be considered. I've seen it done a long time ago. There is nothing to preclude you from setting up a new PS only plan entirely separate from the Safe Harbor 401(k) you have in place. You'd still have to account for top-heavy since additional contributions are now being made to another plan. When many companies who ask this question compare the cost they would pay to the terminated employees to the cost of setting up a new plan (e.g. document and implementation fees), they quickly decide against it. However, it can be done.

Good Luck!

[BG5150]

Then you either have to continue with two plans and pay the yearly admin for both or merge them. Both additional costs.

If vesting is not an issue, could they do a flat dollar QNEC instead? Some documents say there is a last day rule for terms.

[Rai401k]

Erisatoolkit - thank you!

BG5150 - always full of good ideas. They are putting in a HUGE PS contribution. So I don't think the admin fee is going to be a problem for this client. They are looking to add a vesting schedule forgot to mention that. Current vesting for profit sharing is immediate! If we can talk them out of the vesting schedule then the QNEC may be a good idea. THANKS!

[shERPA]

Yes, we will set up a separate PS where the existing plan's PS allocation is not favorable and no last day requirement. Sometimes they stay separate, sometimes they merge in a future year. Nothing precludes an employer from establishing multiple plans, and since PS contributions are discretionary, nothing stops an employer from choosing which plan to contribute to in a given year.

[Bird]

We do it with some frequence and typically merge the old plan into the new as of the first day of the next year.