Adding a 401k (with safe harbor) mid year

[Belgarath]

I'm having a brain cramp - currently a straight PS only - no 401(k) feature. They want to add a 401k feature, with safe harbor nonelective as of, say, July 1. No problem with that. Question is this - the safe harbor feature isn't technically added until July 1. When calculating the 3% nonelective for 2016, they want to use full year compensation. Any problem with this?

[ETA Consulting LLC]

No problem. I'd do the amendment to add the SHNEC and the 401(k) as of 1/1 and then include the delayed date for actually making deferrals.

It should map fairly easily on any Prototype document.

Good Luck!

[chc93]

An ERISA attorney told us that while you can add the 401k and SHNEC as of Jan 1 and begin 401k deferrals July 1... the SHNEC only considers compensation from July 1, since the participant could not defer prior to July 1... also assuming the plan document specifies that beginning July 1, participants can elect 401k salary deferrals. Prior to July 1, participants technically were not eligible to elect 401k deferrals hence not eligible for SHNEC. What about doing an additional regular PS discretionary contribution to get where you want.

[Belgarath]

Thanks - that's precisely the potential interpretation that was concerning me. However, it seems unlikely that the IRS would quarrel with an interpretation that gives everyone a 3% nonelective contribution based upon full plan year comp, in spite of the fact that the 401k feature wasn't added until July 1?

[Kevin C]

We've done it that way many times. You'll want the document to specify how it is done. Our VS document allows you to select either entry date comp or full year comp for the SH contribution. If you want the first year to be different, there is a special effective date section where you can do that.

[Belgarath]

Thanks! I feel the cramp dissolving...

[chc93]

We have other plan documents that specify that if the plan is top heavy, the compensation used for the 3% safe harbor will be the total plan year compensation, regardless of actual date of participation (not eligible to defer). Only downside is that the 3% safe harbor on the pre-participation compensation is now fully vested.