Spinoff a mid-year amendment to safe harbor 401(k) plan?

[Doghouse]

In an attempt to reduce safe harbor contributions for an underperforming subsidiary, it has been proposed that the accounts belonging to employees of that subsidiary be spun off into a new safe harbor plan. The spinoff plan would then be amended to replace the safe harbor match with a discretionary match.

Recognizing that there is little in the way of guidance, what is your gut feeling about whether the spinoff would be considered a mid-year amendment? We don't want to endanger the safe harbor status of the "main" plan.

[Lou S.]

Is this a business transaction that will change the ownership structure?

[QDROphile]

This sounds exactly like the legitimate reasons and circumstances for forbidding mid-year amendment. However, you might think about the rules relating to mid-year cessation of safe-harbor contributions and if compliance with those rules for the spin-off might work.

[Doghouse]

Lou - there is no related business transaction.

QDROphile - the concern is not so much about the cessation of safe harbor for the spinoff, just about the spinoff itself.

[Kevin C]

Regardless of whether you think the spin-off would be treated as a mid-year amendment of provisions that satisfy rules in 1.401(k)-3, the spin-off would be an amendment that suspends the safe harbor match for some eligible employees. If they want the plan to remain qualified, they will need to follow the rules mentioned above that are in 1.401(k)-3(g). Is it worth losing the SH to do this mid-year?

The other option is to do the spin-off at the end of the year, which is what I would recommend.