Terminating safe harbor plan

[Doghouse]

We are TPA for a safe harbor nonelective plan that is terminating. The practice was sold (asset sale) on January 6, and all the employees terminated, but the corporation was kept alive and continued to generate income, which resulted in the owner making a full 401k contribution.

I believe i am correct in stating that to terminate the plan, the 3% safe harbor contribution must be made AND the plan must be subject to ADP testing. The testing would not go well, as there were no deferrals taken from the 6 days of employee pay. It would seem to me that the best thing to do would be to make a QNEC, since the 6 days of compensation won't be much. Right now, I'm thinking that we need 4% of pay to pass testing.

The question is whether we can apply the 3% safe harbor contribution toward testing, such that the employer would only need to fund an additional 1%. i would think so, but want to make sure before we give it the thumbs up.

Any assistance during this very busy time is most appreciated!

Dog

[Lou S.]

Stock sale or asset sale?

If asset sale why not run the plan for the full 12 months, term 12/31/2014 and pay everyone out in 2015?

Yes, you have the 3% required contribution unless you were a "maybe notice plan" and send a supplemental notice.

If stock sale isn't the buyer now responsible for the plan?

[Doghouse]

As I said, it was an asset sale (see first paragraph). The question is not whether they need to do the 3% safe harbor, the question is whether they can count the 3% safe harbor toward ADP testing. What do you think?

[401king]

What Lou is saying is that the plan can salvage its safe harbor status for 2014 if you don't terminate in 2014. Has a resolution already been adopted to terminate? If not, terminate 1/1/2015; then there's no ADP test to worry about for 2014.

[Doghouse]

Thanks Lou and Your Majesty, what you are suggesting is a possibility, but I'd still like to know the answer to my question. The compensation amount for the 6 days is really low so the QNEC may be preferable to keeping the plan going for an extra 5500.

[Lou S.]

You can use the 3% in the ADP but I'm assuming it also goes to the owner as well (unless HCEs excluded from SH by document) so don't forget to add that in when you calculate the owner's ADP. Also if you term early you have a prorated 401(a)(17) limit but yeah 6 days of pay is probably not much unless folks got a big payout of accrued vacation or something like that.

[Kevin C]

The plan can be safe harbor for a short final plan year if the plan termination is in connection with a 410(b)(6)(C ) transaction. They do have to make the safe harbor contribution through the termination date.

See:

1.401(k)-3(e)

(4)Final plan year.—

A plan that terminates during a plan year will not fail to satisfy the requirements of paragraph (e)(1) of this section merely because the final plan year is less than 12 months, provided that the plan satisfies the requirement of this section through the date of termination and either—

(i)

The plan would satisfy the requirements of paragraph (g) of this section, treating the termination of the plan as a reduction or suspension of safe harbor contributions, other than the requirements of paragraph (g)(1)(i)(A) or (g)(1)(ii)(A) of this section (relating to the employer's financial condition and information included in the initial notice for the plan year) and paragraph (g)(1)(i)(D) or (g)(1)(ii)(D) of this section (requiring that employees have a reasonable opportunity to change their cash or deferred elections and, if applicable, employee contribution elections); or

(ii)

The plan termination is in connection with a transaction described in section 410(b)(6)© or the employer incurs a substantial business hardship comparable to a substantial business hardship described in section 412©.