Safe Harbor Per Payroll Match

[Logan401]

My question is in regards to a plan that has a safe harbor match using the per payroll period formula.

An employer is in transition to change payroll providers, and adopts the new payroll provider's plan.

They will continue the per payroll safe harbor match in the new plan.

What if there is a two month gap between the last payroll of the prior plan, and the beginning payroll of the successor plan?

Is there a safe harbor obligation for the gap period, or is the obligation only there for those payroll periods actually made in the prior plan and successor plan?

[Guest A_Dude]

1) Is this simply a restatement of the current plan onto the new providers document? If not, and there was a termination of the previous plan, this violates the succesor plan rules of a 401(k). I hope this is not the case...

2) Safe harbor whether done per pay period or not must be based on annual comp. So assuming this is a restatement, and there was an amendment or blackout notice issues, the match contribution must be made based on the annual comp and deferrals. If it was not timely amended, or no blackout was issued as a result of change of provider made you now must make corrective contributions of the deferral for every participant in the plan.

3) So the simple answer is YES, but depending on how this transition was made you may have much BIGGER issues!

[Logan401]

Let's assume it is a spin-off from an MEP to another MEP.

Are you saying that because of the switch of plans, the formula changes to annualized?

[BG5150]

What if there is a two month gap between the last payroll of the prior plan, and the beginning payroll of the successor plan?

Is there a safe harbor obligation for the gap period, or is the obligation only there for those payroll periods actually made in the prior plan and successor plan?

No one got paid for 2 months?

[Guest A_Dude]

A safe harbor match is always based on annualized compensation and deferrals. Your simply choose to make it per pay period (may need to true-up at end of year), other period to contribute match (may need true-up), or annual.

So, it terminated with the previous MEP plan? In which case, you violated the successor plan rules of a 401(k), by starting another plan with a 401(k) feature without waiting at least one year. Not good...the IRS would consider this a disqualification which would taint the entire MEP plan.

If you don't consider this a new plan, you likely now have to make up deferrals missed for every participant over the two months, and the SH Match as explained above. If a notice or amendment was provided explaining a black out becasue of a service provider change, you can likely skip it....but I would still aire on the side of caution.

[Logan401]

I disagree. if your plans utilize a per payroll safeharbor match formula, and you are truing them up at the end of the year, you are changing the formula which is against safe harbor rules.

[Logan401]

I also must add that the successor plan rule does not work the way you described.

If you terminate a 401(k), you are not allowed to set up a successor 401(k) within 12 months after all assets have been distributed from a terminated plan.

You can certainly set up a successor plan, and merge the balances from one plan to the other if no distributions were made from the prior plan.

[BG5150]

Keep in mind, while the SH Match may be CALCULATED on a payroll basis, it doesn't have to be DEPOSITED every payroll.

A SHM calculated on a payroll basis must be deposited no later than the end of the quarter after which the match was earned. For example, the May 5 payroll match would be due no later than Oct 31.

[Logan401]

What if there is a two month gap between the last payroll of the prior plan, and the beginning payroll of the successor plan?

Is there a safe harbor obligation for the gap period, or is the obligation only there for those payroll periods actually made in the prior plan and successor plan?

No one got paid for 2 months?

yes, they did get paid, however not via payroll provider.

[BG5150]

Was 401(k) taken out?

[Logan401]

Was 401(k) taken out?

No, there was no 401(k) taken out during that period. Maybe another issue in itself?

[Guest A_Dude]

Well I am glad you met the exception to the succesor plan rule there. Who is the employer of the employees? You may disagree with the true-up, but does the document decribe the comp calcualted per the period or annual for applying the match?

Anyways, you cannot use SH rules for the short plan year... Volume 2 of the 401(k) book published by ASPPA (the ones for the exams) in Chapter 5, on page 5-55 states that "A successor plan may not have a short plan year if it want to use the safe harbor rules."

So, you can count the other plan for SH (I think), and you need to test the new plan for for this year. My question then is; does the old plan keep it's SH status?

[Guest A_Dude]

I don't think you could have deferrals and any employer match based of compensation that existed in the interim before the new plan was adopted. You could allow the comp to be used for calculating an empoyer contribution... but I think because this is a SH match, any "gap" in the year would mean that the plan has to use annual SH formula (because of unequal comp period) or cannot use SH at all. Based on the previous with the short plan year; I don't know if the annual SH formula would work even. I would make sure you can also rely on the old plan to be SH or whether they both need testing now? Might not hurt to do testing on both just to be safe...

[Kevin C]

There are a lot of moving pieces here. You haven't provided enough information for anyone to be able to tell if you have problems. What are the plan years for the two plans? When was the old 401(k) plan terminated? When was the new 401(k) adopted? And, what was the initial plan year? Or, was the "new" plan a restatement of the old one?

A safe harbor match can be determined solely on a payroll-by-payroll basis. See 1.401(k)-3©(5)(ii). Of course, the document has to say how the contribution is calculated.

The rule about establishing another plan within 12 months after termination of a 401(k) plan applies for an Alternative Defined Contribution Plan, which is not limited to just a new 401(k). See 1.401(k)-1(d)(4)(i). As mentioned, the rule affects whether distributions can be paid following termination of a 401(k) plan.

The issue with a successor plan deals with the length of the initial plan year of the new 401(k) and the timing of its adoption. See 1.401(k)-3(e)(2). If the new 401(k) didn't have a 12 month plan year or the document was not adopted before the beginning of the plan year, you have violated the plan year requirement of the safe harbor regulations because the new 401(k) is a successor plan and therefore not entitled to the new plan exception for the initial plan year.

[Logan401]

There are a lot of moving pieces here. You haven't provided enough information for anyone to be able to tell if you have problems. What are the plan years for the two plans? When was the old 401(k) plan terminated? When was the new 401(k) adopted? And, what was the initial plan year? Or, was the "new" plan a restatement of the old one?

A safe harbor match can be determined solely on a payroll-by-payroll basis. See 1.401(k)-3©(5)(ii). Of course, the document has to say how the contribution is calculated.

The rule about establishing another plan within 12 months after termination of a 401(k) plan applies for an Alternative Defined Contribution Plan, which is not limited to just a new 401(k). See 1.401(k)-1(d)(4)(i). As mentioned, the rule affects whether distributions can be paid following termination of a 401(k) plan.

The issue with a successor plan deals with the length of the initial plan year of the new 401(k) and the timing of its adoption. See 1.401(k)-3(e)(2). If the new 401(k) didn't have a 12 month plan year or the document was not adopted before the beginning of the plan year, you have violated the plan year requirement of the safe harbor regulations because the new 401(k) is a successor plan and therefore not entitled to the new plan exception for the initial plan year.

It happens quite frequently that a adopting employer of an MEP makes a decision to change payroll providers, and adopts the new payroll providers plan.

Let's assume the prior plan was effective since the beginning of the year, leaves the payroll company in April, 2013, then adopts their new plan with an effective date of July 1, 2013.

I assume they must continue the safe harbor match with the same per payroll formula in the successor plan.

I am questioning the period of transition where they did not have a payroll provider from May through June.

Do we go by the terms of the initial plan that stated "compensation per pay period to be used to calculate safe harbor match", so technically, since no payroll was run in May & June, no safe harbor match is required?

[Guest A_Dude]

"A successor plan may not have a short plan year if it want to use the safe harbor rules." If you use a SH match formula per period basis, and there is a "gap" you effectively have a short plan year. So, you lose SH status, and have to do testing.

Use the "smell test," would DOL likely accept your position that you can skip a period during the year and still be safe harbor for that plan year?

[Kevin C]

You are still saying "new plan", so I will assume two separate plans. If the new document has an effective date of 7/1/2013 and an initial plan year that ends 12/31/2013, it can not be safe harbor. If it was set up as safe harbor you technically have a disqualified plan since it is a successor plan and it needed to be adopted before 1/1/2013 and have a full 12 month plan year. That should be fixable, but you won't be safe harbor under the new plan for 2013. If the new document has the initial plan year ending 6/30/2014 and it was adopted before 7/1/2013, the new plan can be safe harbor.

If their portion of the old MEP was terminated, it lost the SH for the final year because the termination was not in connection with a 410(b)(6)© transaction or the employer having a substantial business hardship. 30 days advanced notice of the suspension of the SH match to participants was required to suspend the SH match. If the termination was effective 4/2013, there are no deferrals after that point until they can defer under the new plan. You follow the terms of the document to calculate contributions until the termination date. What was the termination date?

If the participants were not covered by a plan in May and June, there are no deferrals and no match.