Short Plan Year - 1st year of Safe Harbor

[nancy]

If a new plan is implemented in April, 2001 and wants to use the safe harbor provision, must the first plan year be a short plan year or can the plan be made effective retroactive to the beginning of the plan year (i.e 1/1/01)?

[Guest JBarn]

New plan must use short plan year. Plan also must be at least 3 months long unless a brand new company. An existing 401(k) must convert to safe harbor by start of plan year. You could start a new Safe Harbor 401(k) if you miss the beginning of the year, but that's usually impractical.

[wmyer]

Since the safe harbor provision is part of a profit-sharing plan, can't the profit-sharing plan be effective 1/1/2001? I agree that the safe harbor provision wouldn't be effective before 4/1/2001. However, since the 10,500 limit is a calendar-year limit, that wouldn't be affected by having the safe harbor provision effective 4/1/2001. Also, if you make the profit-sharing plan effective 1/1/2001, the other limits (401a17, 415c &c.) shouldn't be prorated since the profit-sharing plan as a whole isn't a short plan year. And, moreover, even though the safe harbor provision would be effective 4/1/2001, couldn't you use the full year compensation to determine the matching or non-elective contribution if you make the profit-sharing plan effective 1/1/2001? I don't think the IRS has been clear about this. Does anyone have any objection to doing this?

[Guest JBarn]

Remember, a Safe Harbor 401(k) is a qualified plan (in this case P/S Plan)with a CODA. The Plan either starts 4/1,1/1 or whatever. You can't "disaggregate" the PS Plan from the CODA provision. The only answer is 2 separate plans.

With a short plan year 402(g) is pro-rated,although not necessarily 401(a)(4)comp and 415©limit. Are you confusing the ability to do nonelective contributions within a Safe Harbor, with "having a P/S Plan"?

[wmyer]

402(g) is a calendar year, personal limit. It wouldn't be affected by the short plan year. As for the rest, the point is that I'm NOT disaggregating parts. The profit-sharing plan is a full-year plan effective 1/1/2001 (adopted in March or April). I'm just adding a CODA feature effective 4/1/2001 to an already existing profit-sharing plan. Because the plan is effective 1/1/2001 we're not pro-rating any limits.

[nancy]

I don't think 401(g) is prorated, because that is an individual taxpayer limit. Also, the other limits (415,401(a)(17)) would not be prorated if you don't have a short limitation year. I really want to know if the safe harbor provision could be effective 4/1 but the plan effective 1/1 for profit sharing contributions.