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Safe Harbor Plan Termination


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Business will be terminating this year as owner is retiring.  They want to terminate the safe harbor 401k effective 9/30/21 as to get everyone paid out by YE.  Not sure of actual termination date of business but intent is to get everything wrapped up by eoy.  I assume this would qualify as a reason that a plan could maintain safe harbor status for a short year but want to confirm.

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You haven't provided enough information to be able to determine if the final short year will be safe harbor. The rules for the final year are in:



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).


If the plan falls under (ii), it is safe harbor for the final year. If not, it will not be safe harbor for the final year because one of the requirements of paragraph (g) is that the plan satisfy the ADP test using the current year testing method.  Is there going to be an asset or stock sale when the business is terminated? 


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