Can a current calendar year 401(k) Plan still change to a safe harbor

[Guest fiddler]

Can a current calendar year 401(k) Plan still change to a safe harbor plan for 2001? That is, what is the deadline date to give the notice to the participants for 1) a safe harbor match?, 2) a safe harbor 3% non-elective. If it's too late for 1/01/01, can it be done anytime during 2001?

[Guest Don J. Smith]

Great question, I am looking for the same answer.

[lkpittman]

Notice 2000-3 provides the flexibility to wait until December 1 of a calendar year (12/1/01 for 2001 calendar years) to decide to adopt the 3-percent employer non-elective contribution method for that calendar year; however, in order to take advantage of that, the plan must have tested based on current NHCE ADP/ACP for the prior year (2000) and must have provided an "initial" notice to ees by 12/01/00 advising that the plan may be amended during the plan year to provide for the safe harbor nonelective contribution. See Notice 2000-3. Even if you've got a current-year testing plan, I think that you've missed the deadline for the initial notice under the new flexibility rules.

[wmyer]

Notice 2000-3 interestingly does not state that you must provide notice 30 days prior to the beginning of the plan year (by December 1 for calendar-year plans) in order to take advantage of the flexibility in adopting the Safe Harbor Nonelective contribution method. It simply says "prior to the beginning of the plan year." It doesn't even use a "reasonable period" catch-phrase. Usually when the IRS wants something done thirty days before the beginning of the year, they're pretty good about saying so. It seems to me you could make an argument that you could adopt a Safe Harbor with non-elective up to December 31st (for calendar-year existing 401k's), by providing a preliminary notice on December 31st that you may switch to Safe Harbor and by providing a supplemental notice by December 1st of the following year that you will actually give the non-elective. I personally would err on the conservative side, but does anyone have any evidence that this can't be done (specific cite, court ruling, etc.)?

[lkpittman]

Notice 2000-3 does specifically refer to section V.C.2. of Notice 98-52 when explaining how the timing requirement for the initial notice is to be satisified see (Q&A-1 of 2000-3). Notice 98-52 makes it pretty clear that 30 days prior to the beginning of the plan will be "deemed reasonable." I guess you could always fall back on the "reasonable period" requirement, based on all "relevant facts and circumstances . . . " but I wouldn't risk it.

[Guest fiddler]

Thanks for all the replies. However, they were all responding for the "non-elective" safe harbor. What about a "matching" safe harbor. The more I read on it, the more it seems there is not leeway at all. A 60 day had to have been given or else it can't be done for the next year? Do you agree?

[KJohnson]

ALSO, WATCH OUT FOR PLAN DOCUMENT ISSUES. I BELIEVE THE LRMs USE THE 30/90 PERIOD. IF YOU ARE USING A PROTOTYPE YOU RUN THE RISK OF ENGAGING IN PRACTICE THAT MIGHT NOT BE CONSISTENT WITH YOUR DOCUMENT ONCE IT IS RESTATED.

[lkpittman]

At least 30 days prior notice (12/01/00) would have been needed to amend for a matching safe harbor for 2001.

[KJohnson]

lkpittman I thought that the 30/90 day notice period was considered a "deemed satisfaction" of the timing requirement, but that notice could still be timely outside of this period under a "facts and cicumstances" test. Doesn't this apply to both the match and the nonelective methods under 98-52?

I realize that short notice might be less reasonable for a match than nonelective because the availability of the match is dependent upon elective deferrals, but is the 30 day notice requirement "hard coded" anywhere for the matching method?

[lkpittman]

Yes, the 30/90 day period is the "deemed reasonable" period for the notice under 98-52. As stated in my prior post, you could always argue a "facts and circumstances" case for a shorter notice period . . . but I wouldn't want to risk it unless I had some darned good "facts and circumstances." the purpose of 2000-2 was to provide more flexibility on the notice and amending when you are already into the plan year. The IRS didn't provide any more flexibility on the matching safe harbor. I'd be a little nervous with just 4 days notice prior to the beginning of the plan year. What would you consider good facts and circumstances to give the notice 4 days prior to the beginning of the plan year?

[KJohnson]

I agree that it is risky. But, for example, you might have an argument in the case of a small company where employees are only paid monthly and participants can change the amount they elect to defer at any time. Since amounts for any pay in January would not be "currently available" until the end of the month, the employee would actually have all of January to make a decision to change the amount of his or her elective deferrals in order to take advantage of the safe harbor match for the whole year. If the employer actually has a meeting with all employees, hands out new elective deferral forms and explains to them the rammificatons of the safe harbor match you might have more "facts and circumstance" on your side.

[lkpittman]

Sounds reasonable to me, KJohnson. Thanks for the feedback.

[MWeddell]

One can start a new plan, say February 1 or March 1, 2001, covering the same employees and then merge the existing plan into the new plan. The new plan can meet the safe harbor rules. Because it is a brand new plan, there's an exception that allows the first plan year to be less than 12 months and still meet the 401(k) / 401(m) safe harbor rules.

There's a LOT of transaction costs involved with this idea (new plan document, additional audit, additional Form 5500, new SPD, extra vesting if the 1,000 Hours method is used, etc.), so the idea would not appeal to anyone but very large employers. Obviously check with your legal counsel before proceeding.

[Alf]

I don't think that the new plan tactic will work. There is a rule that prohibits an employer with an existing 401(k) plan from setting up a new one under the 12 month rule.

[MWeddell]

There is a rule that prohibits distributions upon plan termination if a new 401(k) plan covers the same employees during the 24 month period beginning one year before and ending one year after the plan termination date. Treas. Reg. 1.401(k)-1(d)(3). That rule wouldn't interfere with a plan-to-plan transfer of assets from the old plan to the new plan.

[Alf]

The rule in in Section X of Treasury Notice 1998-52 and Section A-11 of Treasury Notice 2000-3

[MWeddell]

Alf,

Sorry, I misunderstood what rule you were referring to perhaps.

I agree the cites in your last posting are the relevant restrictions that we're trying to work around. I think establishing a new plan with a short plan year (but still at least 3 months) can comply with the safe harbor rules and then one transfers in a trust-to-trust transfer the assets of the old plan to the new one.

It's an aggressive position (like I said before, check with legal counsel) and involves LOTS of transaction costs, so it's not for everyone. I thought I'd mention it because it seemed responsive to the original question that started this thread.

[card]

MWeddell-

I think it's clear from 98-52 (Section X) that if you have an existing 401(k) plan you can not establish a new 401(k) safe harbor plan mid year and use the "3 month rule." That rule is not available for "successor plans," which is apparently defined in Notice 98-1.

An employer could, however, apparently adopt a new 401(k) plan with a different 12 month plan year.

rob

[MWeddell]

card,

I agree both with your reason for rejecting my original idea and your proposed modification to it. Thanks for adding the citation to your argument.

The new 401(k) plan would have to continue for 12 months before one could then merge the two plans together. Having to operate both 401(k) plans for 12 months adds to the transaction costs. For all but the largest employers, the same money that is spent on transaction costs for this idea might be spend on communications or QNECs in a manner that more cost effectively would solve the testing problem until the beginning of the next plan year.