Safe Harbor 401-k

[KevinMc]

Small CPA firm with a safe harbor 401-k Plan where 1 of the CPA's and some of the staff terminated prior to end of year and formed a new firm. They will not receive Profit Sharing contributions since the plan requires employment on last day of year.

Can they start a new safe harbor plan in December to make up for the lost profit sharing and to maximize salary deferrals or does it have to be a January 1 date for safe harbor 401-k?

[Lou S.]

Does not have to be January 1 but it is too late to start a Safe Harbor Plan for calendar year 2016 as you need 3 months effective deferral to be a 1st year safe harbor plan. Plan would have needed to be in place by September 30th, 2016 for safe harbor.

You can be a regular 401(k) for 2016 with profit sharing or match feature but you are subject to ADP/ACP testing on deferral and match.

You can also use prior year testing for 2016 allowing the HCEs to get 5% of pay plus catch-up for 2016 as prior year assumed to be 3%.

You could set up safe harbor for 2017 or amend regular 2016 401(k) to 2017 safe harbor at the same time as the plan is set up.

[BG5150]

Side note: if it's a small company, did losing the CPS and a few of the staff create a partial plan term?

[austin3515]

Here is a secret trick, but don't tell anyone: you can have a new plan effective 12/1/2016 with a 6/30/2017 plan year end. This satisfies the "at least 3 month" plan year rule. And a 6/30 plan year might be nice for a CPA firm.

[Doghouse]

Here's another trick - there is an exception to the 3 month rule if the sponsoring entity is new.

[austin3515]

"Here's another a better trick"

(2) Initial plan year. A newly established plan (other than a successor plan within the meaning of § 1.401(k)-2©(2)(iii)) will not be treated as violating the requirements of this paragraph (e) merely because the plan year is less than 12 months, provided that the plan year is at least 3 months long (or, in the case of a newly established employer that establishes the plan as soon as administratively feasible after the employer comes into existence, a shorter period).

[Lou S.]

Good to know. Sometimes it is nice to be wrong.

[Tom Poje]

if they make a profit sharing contribution , how does the small CPA firm look for nondiscrim testing.

... since it is small and some of the staff quit you now have 2 rate groups. assuming the one CPA is an HCE will probably pass, but....

[KevinMc]

Thanks for all the help on this. Awesome insights!!!