New Safe-harbor 401(k)Plan for 2001

[SMB]

Client is considering adopting a new 401(k) Plan for 2001 (no existing or prior plan) and may need to go "safe-harbor" (i.e., 10 ees - at least half of whom will be HCEs). Ideally, the decision would have been made 60 days ago and the safe-harbor notice distributed by 12/01/00. However....

Am I correct in my understanding that, if the 401(k) Plan is to operate under the "safe-harbor" provisions, it cannot be made effective until at least 30 days following distribution of the safe-harbor notice, resulting in a short plan year?

Could the Plan be made effective 01/01/01 (so the Plan could use full calendar year compensation), with salary deferrals not starting until 30 days from the date of the safe-harbor notice - or is this too logical to be legal?!

[Guest RJM]

I love compensation questions - they always get so many interpertations. Especially when they are answered with another question: Even though a new Plan might run on a short year, cannot compensation be measured over a 12-month period (Calendar Year or Employer's tax Year) for other than deferral or matching contributions?

Also, if the HCEs are determined by compensation, would the "top 20%" rule help?

[Alf]

I wouldn't be so worried about the notice deadline for a new plan. The safeharbor notice must be provided within a reasonable period of time before the employees become eligible under the plan. IRS Notice 98-52 provides that, in the case of an employee who becomes eligible after the 90th day before the beginning of the plan year, the timing requirement is deemed to be satisfied if the notice is provided no more than 90 days before the employee becomes eligible (and no later than the date the employee becomes eligible). Therefore, keep the calendar plan year and send notice before 1/1/01 and you will be square within the IRS's own deemed reasonable standard.