Profit sharing adds safe harbor 401(k) mid-year. Does the employer ha

[R. Butler]

An employer with an existing profit sharing plan wants to wait until mid-year to add a 401(k) safe harbor provision. This is permissable under Notice 2000-3. My question is in the first year does the employer have a choice between using the matching formula and the nonelective formula or is the employer stuck with the nonelective formula? I can't find anything that says the employer is stuck with the 3% nonelective, but it really doesn't seem consistent to allow this employer to choose and require that the employer with an existing 401(k) plan use the nonelective if safe harbor adopted mid-year.

[wmyer]

According to Notice 2000-3, Q-11 "an existing calendar-year profit sharing plan that does not contain a CODA may be amended as late as October 1 to add a CODA that uses a 401(k) safe harbor method for that plan year." Since there are two safe harbor methods, and 2000-3 uses the word "a," this can only be interpreted that the plan can use either one. The Notice goes on to say that "A similar rule applies for purposes of section VI of Notice 98-52 in the case of the addition of matching contributions for the first time to an existing defined contribution at the same time as the adoption of the CODA."

[Alf]

It makes sense to me. Under an existing 401(k) plan, the government wants the participant to know what she is eligible to get so that she can make sufficient deferrals during the year to get the maximum available match. Adding a match mid-year would be unfair to participants who didn't know that they should be deferring earlier in the year. Adding a nonelective safeharbor late in the year doesn't rip anyone off.

With a new 401(k) plan, no one could defer before the (k) and the match were added, so no one is hurt by the late notice.

[R. Butler]

I understand the reason for requiring the nonelective for the safe harbor 401k's if not adopted by the start of the year, it just does not make sense that the existing profit sharing plan gets the choice.

Employer has a profit sharing plan. Employer wants to add safe harbor 401(k), but wants to minimize contributions. We are going to advise the client to wait until 3 months prior to the end of the plan year to add the s/h 401k. HCE's will be able to maximize deferrals in the last 3 months; economically it is generally not feasible for the NHCE's to do the same. Thus, since the employer has a choice of contributions, employer will choose the match and reduce contributions by 75% to NHCE's.

Now I am glad we can propose this to a client. It makes the employer happy, but he is getting a benefit not available to existing 401k's

[PMC]

What about an employer who doesn't have a 401(k) plan now but adopts one with an effective date retro to 1-1-00 with a plan year of 1-1 to 12-31, deferrals beginning on 12-1-00 (document signed by then) but defining compensation for the entire plan year so they can maximize deferrals (would all have to come from December's paycheck). Can that employer adopt it as a safe-harbor 401(k) for the 2000 plan year making a 3% nonelective to all eligibles throughout the plan year? Notices distributed by 11-1-00.

Notice 98-52 says the plan year must be in existence for at least 3 months, which this one is. Or would the IRS look at this plan as an existing PSP (even though it wouldn't exist until 12-1-00 when adopted)and adding a CODA effective 12-1-00, in which case the October 1 date would have applied? Or, would they look at when the deferrals could have commenced (12-1-00) as say the 3-month period hasn't been satisfied?

[R. Butler]

I'd be careful about the retroactive thing. Employer does not really adopt the plan retroactively, but merely defines comp. over an entire calendar year. I'd make sure the plan allows deferrals to start by October 1.