Safe Harbor Mid-Year Termination

[Vlad401k]

If a Safe Harbor plan is terminated mid-year, what are the ramifications? It seems that it doesn't matter now if the plan is SH Match or SH Profit Sharing, since the IRS has provided additional guidance.

 

I've read from a few posters on here that the ADP/ACP testing must be done in this case. However, the IRS guidance seems to indicate that Final Short Plan Year is a valid reason to avoid testing: 

 

"The safe harbor plan regulations set out several exceptions to the requirement that plan provisions satisfying the rules of §§ 1.401(k)-3 and 1.401(m)-3 be adopted before the first day of the plan year and continue for an entire 12-month plan year. These include exceptions for (i) a short first plan year, (ii) a change in the plan year, (iii) a short final plan year"

 

So, the question is: does testing (ADP, ACP, and Top Heavy) have to be done for a Safe Harbor plan that terminated mid-year?

 

Also, does it matter what the reason is for termination? For instance, does it matter if the plan simply terminated or if it terminated due to a merger into another plan?

 

Thanks.

[stephen]

1.)  does testing (ADP, ACP, and Top Heavy) have to be done for a Safe Harbor plan that terminated mid-year?

IT DEPENDS.

For short plan years created by the termination of a safe harbor plan, the plan sponsor may operate the plan during its final year in one of the following ways:

Cease safe harbor contributions as of the date of termination and apply ADP/ACP tests to the plan for its final year using the current year testing method; or

The plan may continue to be a safe harbor plan for the final plan year if the safe harbor requirements are met through the date of termination, and:

The plan’s termination is in connection with certain business transactions described in Code section 410(b)(6)(C) (e.g., change in employer’s related group), OR

The employer incurs a substantial business hardship, as described by Code section 412(c)(2).

 (from https://www.ftwilliam.com/Docs/Safe_Harbor_Webinar_10282015.pdf - slide #53) 

 

2.) Also, does it matter what the reason is for termination? For instance, does it matter if the plan simply terminated or if it terminated due to a merger into another plan?

Yes. See answer #1 above.

 

[Below Ground]

I am having some trouble with the "the plan’s termination is in connection with certain business transactions described in Code section 410(b)(6)(C) (e.g., change in employer’s related group)".  Specifically, if the firm is sold in an "asset sale" does that qualify as a change in the employer's related group?

[Mike Preston]

My recollection is that the IRS interprets what constitutes a 410(b)(6)(C) transaction expansively.

[Kevin C]

Here's the reg Mike is referencing.

Quote

1.410(b)-2(f) Certain acquisitions or dispositions. Section 410(b)(6)(C) (relating to certain acquisitions or dispositions) provides a special rule whereby a plan may be treated as satisfying section 410(b) for a limited period of time after an acquisition or disposition if it satisfies section 410(b) (without regard to the special rule) immediately before the acquisition or disposition and there is no significant change in the plan or in the coverage of the plan other than the acquisition or disposition. For purposes of section 410(b)(6)(C) and this paragraph (f), the terms “acquisition” and “disposition” refer to an asset or stock acquisition, merger, or other similar transaction involving a change in employer of the employees of a trade or business.

[Below Ground]

Thanks.  Greatly appreciated.

 

[JustMe]

Coming back to this thread - if a SH plan (Plan B) merges into a non-SH plan (Plan A) mid year due to an acquisition, can the safe harbor provisions be met through the date of the merger for Plan B? Then, for Plan A, the ADP test will include census data for the full year for Plan A employees and only census data post merger for Plan B employees??