Safe Harbor NonElective

[thepensionmaven]

client formed their own 401K after deciding to leave ADP MEP, December 1st, 2016.

Effective date of plan 12/1/2016, plan is a SHNE with the 3% non-elective contribution.

Wouldn't the safe harbor contribution be due for only 1 month?

Plan Year and limitation year both calendar year.

[BG5150]

A SH plan has to be at least 3 months, I thought.

[K2]

A SH plan has to be at least three months.

[thepensionmaven]

True, totally missed that one.

Accountant gave some erroneous information.  Apparently plan effective 7/1/2016, but the first employee contribution not made until December, 2016.

SH Notice supposedly given out.

Compensation is defined as compensation from date of entry.

I would think date of entry, meaning July 1st, even through the accounts were not opened until December 1st and first deductions were December 15th.

Safe harbor has yet to be calculated, accountant adamant compensation should be from December 1st, not July 1st despite our attempts.

[K2]

Comp definitely should be from 7/1.  More importantly, upon audit, IRS would likely say the 3 month requirement wasn't satisfied and therefore ADP testing would be required in year one.  Just basing that supposition loosely on the facts as you've portrayed them.  

 

I'd disassociate myself from that accountant.

[BG5150]

When does the document say the deferrals start in the new plan?  If BOY (7/1), then do you have a problem that no deferrals were taken until December?

[ETA Consulting LLC]

I would be interested in hearing how you could leave a MEP and not be a successor plan.  In the MEP, ADP would appear to be the employer for tax withholding and reporting purposes but the client would be the common-law employer.  So, there would appear to be dual employment where each employee is simultaneously employed by two distinct employers; and it's okay since the MEP is actually sponsored by both of those employers.

I'm failing to understand how the client (one of the employers) can simply leave and start another plan without it being a successor plan (making it where those same employees were part of another 401(k) plan sponsored by the employer during the year).

I'm just trying to piece this together, because I might be missing something.

Good Luck!

[BG5150]

Could it be considered a spin-off?  Otherwise, anybody leaving a MEP would be out of luck for a year.

[ETA Consulting LLC]

Not necessarily out of luck, but "yes" with respect to trying to establish a safe harbor within the same year.  This doesn't even delve into the fact that there isn't a severance of employment with the common law employer. So, ADP would have to rely in instruction from the common-law employer with respect to when a person terminates employment and meets a distributable event. 

Typically, if you're going to leave a MEP, a spin-off may be in order.  I would bet that more often than not, there was a merger that brought the plan into the MEP in the first place.  So, all you're doing to going back to the way things were before the client joined the MEP.  Not saying that's always the case, but it is the case the majority of the times I've encountered this.

Good Luck!

PS: Now that I think about it, out of luck for a year pretty much sums it up.  It would, effectively, be a plan termination (which is a distributable event), and that would require that there be no successor plan within the following year.

[BG5150]

So, out of luck for two years: 2016 & 2017.

[Kevin C]

The IRS has never provided any guidance about spin-offs and mergers of safe harbor plans. 1.401(k)-3(i) just says "reserved".  Was your situation a spin-off from the MEP and merger into the new plan? If so, do the new plan SH provisions mirror those in the MEP?  

Leaving the MEP would not be a distributable event for the active employees because the new plan is an alternative defined contribution plan under 1.401(k)-1(d)(4)(i).

If the new plan says deferrals start 7/1/16 and they did not start until 12/1/16, there are problems.  Were there no deferrals from 7/1/16 - 11/30/16?  Or, were deferrals made to the MEP until 12/1/16?  What about SH contributions?

[thepensionmaven]

          OK, let me start over, as there appear to be new facts. 

Client under ADP MEP.  He mentioned to a friend who is also his broker that the participants wants more investment choices and also want ability to make Roth contributions, which ADP plan does not provide.

 

Participants given the proper notices, new plan effective 10/1/16, new plan for client, #001 as they technically are not sponsors of the existing arrangement.  Paperwork signed, blackout period, etc.

Accounts were not physically opened until November 30th and the rollover from ADP was done 12/15.  For all we know, the participants changed their elections 10/1 to 0% and submitted December 1st to their previous amounts.  The plan does let the participants change their election at their request.

 

Client informed me just last week that they have not made the SHNE contributions for either 2015 or 2016 as "no one told us how much"; and asks if the plan is out of compliance.  

 

As I understand it, the contribution has to be paid by the due date of the company return, but it does have to be made. As far as the SHNE 3%, even though the first plan year would be a short year from 10/1-12/31/15 and normally I would have the client make safe harbor contribution for 3 months of W-2, the client did not even make the first 9 months safe harbor to the MEP.  The client has always made their safe harbor contributions in bulk after the end of the year.

 

Therefore I would think the client owes the safe harbor for the whole of 2015.

 

I was reviewing ASPPA 2015 annual conference presentation on MEPs that mentioned some but all  MEPS limit the ability to get out.  Apparently, this client

did not have a problem.

 

Also stated during the presentation that if an employer wanted to maintain a plan of which they would be the Plan Sponsor this could be done; this plan be restated as a stand-alone.

 

Hoping this will all pass muster if the client ever gets audited.

 

 

 

[Kevin C]

Yes, they are out of compliance.  It's impossible to tell how much of a mess they created without copies of the new document, the MEP document, including amendments and merger paperwork and accurate information on what actually happened. I wish you luck.

[thepensionmaven]

New docs we have, MEP agreement we have, prototype we have;

From the ASPPA workshop, I don't understand why you think this is a merger or a spin-off.

ASPPA session never mentioned anything about a merger.

The company started their own plan and rolled over from prior Plan Sponsor's plan.

I never heard anything said or the subject of a merger even being brought up at the ASPA conference concerning MEPs.

What are we missing here?

[BG5150]

If the participants did not have an option to take a distribution, I would say that this is a spin-off.  If they were, then it's a new, successor plan.

It's not a merger, as there was no existing plan with which to merge.

 

[Kevin C]

You said they started a new plan.  Spinning off their portion of the MEP and merging it into the new plan is typically what happens.  As  I said before, leaving a MEP is not a distributable event if the employer has an alternative defined contribution plan. The new plan is an alternative defined contribution plan.  Participants have to be eligible for a distribution before amounts can be rolled over.  A spin-off gets the assets and liabilities for the employer's participants out of the MEP without there being distributions.  As others mentioned, there could also be successor plan issues with having a short initial plan year for a SH plan. 

 

I suggest you find a consultant or ERISA attorney who is qualified to help your client and provide him/her with all the information you have on the plan.  Again, I wish you luck.

 

[Tom Poje]

one of Sherlock Holmes mysteries, so here is

 "Dr" Watson's explanation, "The MEP headed-league", as found on Benefits Link  Q and A

https://benefitslink.com/cgi-bin/qa.cgi?db=qa_who_is_employer&n=341

Moving Out of a Multiple Employer 401(k) Plan

(Posted April 13, 2017)

Question 341: An employer wants to move out of the 401(k) plan operated by their current PEO and establish a 401(k) plan with more flexibility in design. The plan with the PEO (which is co-sponsored by the employer) is not a safe harbor plan. Would the new plan be a 'successor' plan? Could it be a safe harbor plan? Answer: This is one of the many situations where the pension community can fondly wish that Treas. Reg. 1.401(k)-5, entitled "Special Rules For Mergers, Acquisitions And Similar Events," said something other than "[Reserved]." After all, it's been 13 years since the Treasury issued the final 401(k) regulations. Isn't that reservation a little stale by now? We are left to do the best we can with "unspecial" rules that do not consider the peculiarities of such transactions. Let's examine this issue a piece at a time: Is the new plan a different plan than the PEO plan, or merely a continuation? It is truly a new plan. There is a new "pot of money" under a new document and a new trust, filing a separate 5500 (which should have the "first year" box checked). Was the PEO plan maintained by the employer? Yes. The employer may not have had the power to do anything under the plan other than make contributions and terminate participate, but it signed on as a sponsor, and that is enough to maintain a plan. Is the new plan a successor plan under the 401(k) plan rules? Yes. Reg. 1.401(k)-2(c)(2)(iii) defines a plan as a successor plan if "50% or more of the eligible employees for the first plan year were eligible employees under a qualified cash or deferred arrangement maintained by the employer in the prior year." That is the definition that applies for the safe harbor rules. See Reg. 1.401(k)-3(e)(2). Can the employer set up a safe harbor 401(k) plan immediately upon withdrawal? Yes, but that plan will need to have a 12-month plan year. The rule that allows a short initial plan year does not apply because the plan is a successor plan. Suppose the employer is willing to have an initial 12-month plan year, starting May 1. Can the employer convert to a calendar year plan thereafter, perhaps by having a short year from May 1, 2018 to December 31, 2018? Yes. Reg. 1.401(k)-3(e)(3) specifically allows the plan to retain safe harbor status in this situation, although both the prior year, ending April 30, 2018, and the following year, beginning January 1, 2019, would need to be safe harbor. Would the employer be able to carry over the deferral elections from the prior plan as an automatic enrollment device? It would not qualify as an ACA under ERISA or a EACA or a QACA under the Code because the deferrals would not be "uniform." Otherwise, I cannot see anything that would prevent it, assuming the plan document is sufficiently flexible to permit it. Would the employer be able to give the safe harbor notice now, less than thirty days before a May 1 effective date? Yes. Because this is a new plan, the notice is "deemed reasonable" if given any time before the May 1 entry date. Reg. 1.401(k)-3(d)(ii). The fact that this is a successor plan does not affect this rule. Chapter 22 of my book, Who's the Employer, defines plans. Chapter 18 discusses multiple employer plans. For information about the upcoming 7th edition