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Terminating 401k safe harbor match mid year


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Calendar year 401k plan with basic safe harbor match - 4 participants - 2 out of the 4 are owners

Client was using a payroll provider but due to financial issues took the payroll in house in September 2014. The client stopped making the 401k contributions and safe harbor match in September.

I prepared the ADP/ACP test for 2014 and both tests fail. Refunds are needed to for both owners. Also prepared the top heavy test with a determination date of 12/31/13 and the plan is top heavy for 2014

Client doesn't have the money to fund the top heavy minimum and wants to termiante the 401k plan. What are the ramifications for the client refusal in making the top heavy mimimum?

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Did they exit safe harbor by amendment and also amend to remove the deferral option from the plan? The method suggested, to run ADP/ACP testing would apply then.

Otherwise it's still a safe harbor plan (no ADP/ACP test), but is disqualified as Lou said. An EPCRS correction should be considered to bring back its tax-favored status. Where deferrals still withheld from paychecks?

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Without an amendment to exit safe harbor, the ADP/ACP test does not apply. Plan is still safe harbor, just not in compliance, although technically the safe harbor contribution is not due until 12 months after the end of the plan year, earlier if the SH was not an annual true-up.

Sound like the employer stopped withholding deferrals from wages without the proper legal action allowing them to do so.

These are operational defects which now jeopardize the plan's tax-favored status.

Perhaps when they enter into bankruptcy they won't care about that either.

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And while they may have had the best of intentions to keep the business going, without the proper amendments and notices to employees they might still be on the hook for the salary deferrals they improperly stopped, the safe harbor match they aren't making back to when they stopped and the problem will continue to accrue for at least 30 days after they notify employees and execute the proper amendments freezing the plan.

Though if they go into bankruptcy they may be able to get out of the contributions.

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