PEO spin off plan - PEO and new plan Safe Harbor

[cpc0506]

Employer A was a participating employer in a PEO.  PEO had a safe harbor 401k plan.  PEO plan is a calendar year plan.

 

Employer A has decided to leave the PEO 401k plan and establish its own plan. Effective  in April,  they want to spin-out of the PEO into their own  plan. It is my understanding that client would be subject to  ADP/ACP test for the short year under the PEO since the safe harbor provisions were not in effect for a 12 month period.  Is my assumption correct?

 

My thought is that the  Plan  ( effective in 2019) would  essentially be a new start-up  plan for this Employer A with assets  attributable to them  being  transferred from the PEO. This would be Employer A's #001  plan.  However,...

 

If the 2019  Plan is a start-up (effective  April  1, 2019) and this Employer wants to have a fiscal year end 9/30 PYE, would they be eligible to establish this Plan as a Safe Harbor plan? There would obviously be more than 3 months left in the PY to make elective deferrals. BUT would this fail the safe harbor rules of no consecutive short plan years?  What about establishing the Plan Year as April 1 to March 31 for an initial full 12 months and then change to another fiscal year end  in the future if need be.

 

This is the first time we have come across this kind of request.  Any guidance or cites you can provide would be greatly appreciated.
 

[Kevin C]

There is no guidance (formal or informal) on mergers or spinoffs of safe harbor plans.  There was a section reserved in the final regs for it, but the IRS has never done anything with it.   The best you can do is to use a reasonable good faith interpretation of the existing code and regs.

A new plan would be a successor plan and not eligible for a short initial plan year under 1.401(k)-3(e)(2).  Having a final short year for the PEO plan would very likely not be SH under 1.401(k)-3(e)(4).  To avoid problems and stay safe harbor, you need to not have two short plan years.  Since this is happening mid-year, the only way I know of to do that is to restate the spun-off plan instead of starting a new plan and have the restated plan document mirror the SH provisions used under the PEO plan.  The result for participants is exactly the same as it would have been if they stayed in the SH PEO plan. You should be able to change the plan year to end 9/30/19 in the restated plan if you follow the rules in 1.401(k)-3)(e)(3).  Others may have different ideas, but that's what I would do.