Spin Off & Safe Harbor / ADP Test Question

[415 Limit]

An Employer is in the process of establishing a new single employer plan (401(k)) effective in 2023.  They will spin off (not terminate) from a PEP that they are currently in and transfer the assets from the PEP into the new plan.  They do not have a safe harbor provision in place in the PEP, but they would like to add a safe harbor provision to the new plan for 2023.  Is this permissible?  How would the ADP testing work for 2023, would they need to test separately in the PEP for the short period and correct via refunds / QNEC (assuming the test fails for the short period), or are we permitted to test the entire year under the new plan (and the safe harbor provisions, assuming this can be added to the new plan in 2023)?

Any input would be greatly appreciated.

Thank you very much.

[Lou S.]

My understand is the employers in a PEP are adopting employers who are participating employers in a 401(k) Plan. That is it's a multiple employer plan that diffrent employers adopt to get "simplified" administration and presumably lower asset fees due to pooling.

So if you spin off mid year into a Single employer plan you would test the whole year together by aggregating the data of the two plans.

And any limitations on amending mid year in or out a safe harbor would apply as if you had a single plan.

Make sure you preserve any protected benefits from the plan that's being spun off and merged into the new plan.

But I don't have very much direct experience with PEPs so if my understanding is off I'm sure someone on this board will correct me.

[415 Limit]

Lou, thank you so much for your valuable input.  All excellent points you mention and also stating the technical (correct) terminology.

What exactly do you mean when you say 'And any limitations on amending mid year in or out a safe harbor would apply as if you had a single plan', can you give an example?

[Lou S.]

See here for examples.

https://www.irs.gov/retirement-plans/mid-year-changes-to-safe-harbor-401k-plans-and-notices

I believe with Secure Act you can add a 3% non-elective SH up to 30 days before the PYE or a 4% non-elective SH up until the end of the Plan Year but you can't add a matching SH mid-year, that needs to be done before the PYE with the associated SH notices and timing that goes with it.

And you aren't allowed to switch between SH types (matching or non elective) mid year.

[415 Limit]

Thank you, Lou, I understand and appreciate your input.