First Year Safe Harbor 401(k) Plan

[Guest barrydorfman]

A calendar year self-employed employer with 4 other employees wants to establish a safe harbor 401(k) profit sharing plan as of 8/15/00. Does the first plan year have to be a short year? If so, are the $30,000 sec. 415 limit and the annual $10,500 deferral pro-rated (I know the comp. limit would be)? Or, can the plan be effective 1/1/00? If so, does a 3% safe harbor cont. have to be made for the full year's comp. or just on comp. since the deferrals became effective (8/15)? I am confused about how the sec. 415 limits would be calculated, especially if the employer wants to make an additional non-elective profit sharing contribution.

[Guest]

you can not have a retroactive date in a safe harbor plan.

you are stuck with the short year if you go that route.

it sounds like you would be better to establish a 401(k) plan and have the safe harbor option apply to the next year.

The big issue of course is you can't defer on prior $, yet safe harbor is giving you a free pass on the ADP test.

You can establish a regular 401(k) with retroactive effective date, and since you can use 3% for prior year testing, just make sure owner doesn't defer for than 5%, and you will pass testing. If there is a match, watch out for multiple use. Plan will probably be top heavy, so you will have to give 3% based on full year comp.

Provided notice of going safe harbor by Dec.1