Deadlines for new plans (2022)

[401kay]

Hello! 

I was hoping someone could help clear up some deadline confusion for new plans. 

I'm not clear on what the final deadlines are for establishing a new plan (both Traditional and Safe Harbor) for this year. Is it October 1st?

If its auto enrollment does that mean September 1st? But if there's not auto enrollment provision then its extended to October 1st?

I saw some mention that you can start a plan as late as December 31st, but is that only for plans starting next year?

Any clarity would be massively helpful! Thank you!!

[Lou S.]

Assuming calendar year tax payer and calendar year Plan for 2022 -

Employer contribution only (PS/MP/DB/CB) - under SECURE the latest date would be the due date of the tax return with extensions. So deadlines would be 3/15/23 or 4/15/23 unextended depending on entity and extended deadline would be 9/15/23 or 10/15/23. And minimum funding deadline for plans subject to it would be still be 9/15/23.

For traditional 410(k) Plan you can't make deferrals effective prior to the earlier of the signature date or effective date so you need plan adopted and 401(k) elections by 12/31/2022.

For safe harbor 401(k) non-elective you need at least 3 months of effective deferral to be SH plan so you need the plan in place by 10/1 and elections starting the first payroll in October.

For Safe Harbor matching you also need to give out a safe harbor notice in a reasonable time before the deferrals start. The IRS deems 30-90 days prior as reasonable. So you need to distribute SH notices by 9/1/2022. Now you can distribute notices between 9/1/22 - 10/1/22 and show that was reasonable but the burden of proof on reasonableness becomes facts and circumstances for you to justify less than 30 days notice as reasonable.

Now how much lead time you need to do all this before those dates like design, documents, opening trusts, getting enrollment materials and ee notices, having ee meetings, setting up payroll, etc. I leave that up to each individual Employer/TPA/Custodian.

 

[401kay]

Thank you so much Lou! So we can start a traditional 401k (not auto enrollment) up until 12/31 for this year? Is it just safe harbor that requires 3 months?

And can we convert the plan to auto enrollment at the beginning of the new year?

[Lou S.]

Yeah, testing is always an issue with late added 401(k) plans and getting people signed up in time for payroll deductions. I usually see the Plans set up with prior year testing the first year and limit HCEs to 5% of pay plus catchup to pass testing and concurrently amend to change to current year testing for the next year or amend in a safe harbor for the 2nd year going forward.

I don't see why you can't amend to have auto enrollment start the following year if that's what you want. I think that's a notice issue you are concerned about right? Giving folks advance notice before the auto enrollment?

[401kay]

Yeah exactly, we're concerned about enough notice time. So if we restrict HCEs to 5% to help us pass testing, in theory we should be able to start new plans up until 12/31?

[C. B. Zeller]

44 minutes ago, Arnie401k said:

So we can start a traditional 401k (not auto enrollment) up until 12/31 for this year?

While you can do this, it's asking for trouble. What will happen is the business owner will sign a 401(k) plan on 12/31 and then go and issue themselves special payroll with some 401(k) deferrals on it. Presumably no one else gets the opportunity to receive some extra pay that they can all of a sudden contribute to the plan. Even if you cook up a way to pass the ADP test (like the one Lou described using prior year testing), you still have a nondiscrimination failure on the availability of the deferral feature.

If you are going to put in an 11th hour 401(k) plan, make sure you get deferral elections out to employees, and early enough that they have an effective opportunity to defer.

[401kay]

Got it, thank you! It seems we shouldn't allow any new plans that late and it might be best to cut it off mid-November, and we can start new plans in the new year. Just good to know its not all over October 1st! 

[Luke Bailey]

3 hours ago, C. B. Zeller said:

you still have a nondiscrimination failure on the availability of the deferral feature.

You could be top-heavy for first year as well.

[Joe L]

On 8/16/2022 at 7:55 PM, Luke Bailey said:

You could be top-heavy for first year as well.

Luke: I have seen this exact issue in the past. A non-safe harbor plan was established late in the year and the owners max deferred. They failed the ADP test and got most of their money back, plus the plan was top-heavy so the employer made a 3% top-heavy to the non-keys.

[Luke Bailey]

4 hours ago, Joe L said:

Luke: I have seen this exact issue in the past.

Joe L, yes, me too. It's special. It's clear the way the regs are written that the allocations for HCE(s) count for top-heavy at end of first year even if they are all distributed because of ADP test failure. The case I had with this issue was 25 years ago, and nothing's been changed, except I hope that the financial advisers that sell plans to small business owners late in the year are more aware of the problem.

[eRIZZa]

Regarding end of year plan starts- in terms of defining compensation for various purposes (HCE vs NHCE, deferral ratios, allocations, etc.), if you have a plan that retroactively starts Jan 1 but the 401k feature (among other provisions) isn't adopted until later in the year, how many pay periods would you count? 

[Bri]

That's just a matter of your plan's specific provision/definition of compensation for all those.  Compensation as a participant, versus full year pay, and then as of what date are they considered participants in the 401(k) arrangement.  Sponsor choice, to an extent.