Entity in Controlled Group revoking Safe Harbor

[NW529]

A controlled group is made up of two entities and one of the entities would like to revoke Safe Harbor mid year. 

All the HCEs are in the entity that is revoking Safe Harbor.

How would the 2020 Coverage Test be performed for the 401(m) portion?  Are all the NHCEs considered as benefitting due to the Safe Harbor for the partial year?

Any feedback is appreciated!

 

 

 

 

[C. B. Zeller]

Is it 1 plan covering both entities, or 2 plans tested together?

[NW529]

One plan covering both entities

[C. B. Zeller]

Then you can't do it. Notice 2016-16 covers permissible mid-year changes to safe harbor plans, and prohibits a mid-year change to reduce or narrow the group of employees eligible to receive safe harbor contributions.

[NW529]

Hi @C. B. Zeller, would it make a difference if it was 2 plans tested together? Even if it was 2 plans tested together, they are still considered "one employer" and you would still be reducing the number of employees eligible to receive the Safe Harbor contributions. 

[MWeddell]

Who has the power to amend the plan document?  That entity can decide whether to revoke the safe harbor status.  However, there are restrictions on doing that.  The participant safe harbor notice must have the magic language or the employer must be operating at an economic loss.

[C. B. Zeller]

The difference is that, if it were 2 plans, you could terminate the safe harbor for one of them (assuming the conditions MWeddell specified are met) and retain it for the other. The plan that terminated its safe harbor would be subject to the ADP test for the year, but the other plan could continue its safe harbor status. Assuming they both pass coverage, of course.

[Bill Presson]

Typing out loud here: what if the entity that wanted to revoke safe harbor elected to spin off their portion in the plan to create a new plan and then revoked safe harbor? I assume that's possible? Then each would have to satisfy coverage testing on their own?

[C. B. Zeller]

Possibly, although taking that line of thought a step farther, what would prevent any employer, controlled group or not, from spinning off a portion of their plan and terminating its safe harbor mid-year? If you could do this, wouldn't it make that section of 2016-16 meaningless?

[MWeddell]

A mid-year change to make some employees cease to be eligible for a 401(k) safe harbor plan (because they are now eligible for a spin-off plan) is prohibited by Notice 2016-16, Section III.D.2.  In other words, I don't believe that Bill Presson's latest idea works.