Non-SH(k) adopted 2016 was supposed to be SH(k). Can convert to SH in 2016?

[Florida1]

Client's old FA set up a calendar year non-SH 401(k) effective 4/1/2016 which excludes leased employees. Can it be converted to a SH-401(k) covering leased employees now? Client has leased employees that he is happy to include now that he knows he needs to in order to pass testing. Solutions much appreciated.

[Lou S.]

Once you have a non SH plan you are locked into non-safe harbor plan for the the year. You can amend for 2017.

[BG5150]

What testing does he need to pass if the plan is to be Safe Harbor?

[Florida1]

Coverage ratio and average benefits failed. H=100% owner. W= owner by attribution (2 minor children). H=only employee on payroll. 20+ leased employees. More than half would be eligible for the plan (age 21 & 1 YOS = 1,000 hours). None of the leased employees would be HCEs. Small leasing co with no plan of its own. When plan was opened, H immediately deposited entire 2016 salary deferral amount. Advice as to how to proceed with client is much appreciated. TY.

[Tom Poje]

since the leased employees have met eligibility you fail coverage since they are not in the plan.

this would require a corrective amendment to give them a QNEC to pass coverage. so you give them all 3% which is the same effect as a 3% safe harbor (except that you would have to run an ADP test but could include the 3% in the test. without knowing actually numbers - how much HCE deferred and his comp and if the children are in the plan and not deferring you are probably no off worse than a safe harbor.

actually you said the plan started in 2016 so amend to immediate eligbiility. everyone is in

owner defers 18000 and has max comp so ADP% is 6.9

2 children in the plan not deferring so the avg is only 2.3%

so to pass testing they only need 1.15% to the NHCE (not 3% as required with a safe harbor)

first year of plan, so top heavy determined at end of year. so give NHCEs 1.15% of pay or just enough more so plan is not top heavy. to be safe, make deposit by 12/31 (regs say you really shouldn't use contributions deposited after 12/31 in determining top heavy. but this sounds like it might not be as expensive as a safe harbor - and would never be if the owners children don't defer and the ADP avg is less than 5%.

[Florida1]

Thank you for a solution!

[austin3515]

That;s why they let Tom literally "write the book."

[austin3515]

In case you're not sure what I am referring to:

http://www.wklawbusiness.com/store/products/coverage-nondiscrimination-answer-book-fourth-prod-0735581940/hardcover-item-1-0735581940

[Tom Poje]

It would probably be better for all if Tom had the 'book' thrown at him instead.

you have to put up with his dry humor and everything else

but if I have managed to share a little knowledge or useful advice then maybe it balances things out.