terminating a safe harbor plan due to retirement

[cpc0506]

Client is closing down his medical practice on July 31, 2019.  He sponsors a safe harbor 401(k) plan. 

1. Does he have reliance on safe harbor status even though plan is not a full year?

2.  Is a notice to participants required?

3. Is there any special language needed in the amendment to terminate?

The small firm that I was employed by has been bought by another firm whose termination procedures were very different from the way we handled plan terminations.  I am looking for guidance on how others handle plan terminations.  Thanks for your reply.

[Kevin C]

The rule you are looking for is 
 

Quote

1.401(k)-3(e)(4) Final plan year. A plan that terminates during a plan year will not fail to satisfy the requirements of paragraph (e)(1) of this section merely because the final plan year is less than 12 months, provided that the plan satisfies the requirement of this section through the date of termination and either—

(i) The plan would satisfy the requirements of paragraph (g) of this section, treating the termination of the plan as a reduction or suspension of safe harbor contributions, other than the requirements of paragraph (g)(1)(i)(A) or (g)(1)(ii)(A) of this section (relating to the employer's financial condition and information included in the initial notice for the plan year) and paragraph (g)(1)(i)(D) or (g)(1)(ii)(D) of this section (requiring that employees have a reasonable opportunity to change their cash or deferred elections and, if applicable, employee contribution elections); or

(ii) The plan termination is in connection with a transaction described in section 410(b)(6)(C) or the employer incurs a substantial business hardship comparable to a substantial business hardship described in section 412(c).

Is the client selling the practice or the assets of the practice?  We need that piece of information before we can answer your questions.

[cpc0506]

5 minutes ago, Kevin C said:

The rule you are looking for is 
 

Is the client selling the practice or the assets of the practice?  We need that piece of information before we can answer your questions.

No, he is not selling his business.  His lease is up at his current location and is closing down this practice as of that date.

[Kevin C]

If there is no 410(b)(6)(C) transaction, it falls under (4)(i) and treated as a mid-year suspension of the safe harbor contribution.  That means he isn't safe harbor for the short final year and advanced notice is required. 

Terminating the plan at the end of the year is probably going to be a better option. He may even have some receivables that will come in between now and the end of the year.

[Doc Ument]

The condition that is most frequently overlooked when applying the mid-year reduction/cessation regulation is the following requirement (i.e., not only must there be an amendment to cease (or reduce) the ADP SH contribution after giving 30-day advance notice, but the plan must also be amended as follows):

1.401(k)-3(g)(1)(i)(E): The plan is amended to provide that the ADP test will be satisfied for the entire plan year in which the reduction or suspension occurs using the current year testing method described in § 1.401(k)-2(a)(2)(ii)

It is not sufficient to just amend to end the ADP SH contribution because to be qualified, a 401(k) plan must affirmatively state the specific method by which the ADP requirement is going to be met (see 1.401(k)-1(e)(7)). In this case, because one ADP-test method is being removed via a midyear amendment (i.e., the safe harbor method that had been in effect for that plan year), another method must be specified by the document to use in its place, and the safe harbor regulation requires that the plan be amended to use only the method specified above. (In some cases, though, a plan might already provide that upon any midyear amendment to cease or reduce ADP SH contributions, the plan will automatically use the current year ADP testing method described in § 1.401(k)-2(a)(2)(ii) for the entire plan year, in which case the drafter might reasonably choose to rely solely upon such pre-existing language.)

[Bird]

Before you go too crazy with the mid-year stuff, find out what the client wants to do.  It's common - almost the rule in what I've seen - for the client to be happy, or at least content, with keeping the plan open through the end of the year and making contributions for the whole year as required/desired.  Obviously (?) any employees will have reduced pay if they are term'd, and he might have receivables coming in that make a final year contribution attractive.