Starting new safe harbor plan

Hi

A corporation wants to start a new 401k/SH plan (basic match) for 2022.

The only non-owner employee was fired early in the year as was stealing money from the company and worked over 500 hours during the year.

If the owner sets up a 401k/SH plan today for 2022 and makes no profit sharing contribution i.e. deferral plus safe harbor match, I see no issue, correct?

How about, adding profit sharing? As the employee would need to get an allocation for 2022 to pass 410b, would the employee need to be vested at all?

Thanks

If you're not adding in the guy via an -11g, but rather he shares under the normal allocation rules of the plan, then I think you could probably avoid anything other than the plan's normal vesting schedule.  Another thought would be to run a short plan year starting after the guy's termination date so that he was never eligible anyway - you don't need 12 months to get the full deferrals in.  Would a pro-rated compensation limit take a big chunk out of his intended employer contributions, though?

There is no PS, only SH match and depending on if a deferral is made or not. There is no vesting issue for these 2 provisions. I may even design the plan without any PS provisions and add in 2023.

Not sure if I agree with the short plan year approach.

What about excluding vesting prior the effective date of the plan?

Give the guy an allocation (assuming you have fail safe in document to bring him in) , forfeit his balance, reallocate next year.

You do have to worry about the Partial Plan Termination rules but pretty sure you can make a pretty good facts and circumstance argument for not unjustly enriching an embezzling employee if you have that all documented.

Hi Lou

I agree with your latter comment but I do not wish the client to be testing case for this, if the plan is audited.

However, I am not planning to have any PS allocation, just 401k and basic SH, both 100% vested.

Also, your first part statement will only work if the plan's hour/last day requirement is very liberal otherwise the plan will need an 11-g amendment and partial (or full, according to some) vesting needs to be provided. 

My thought had been, If you ran a short year from July 1 to December 1, the owner could get all 27,000 in deferrals and 4% of pay up to 152,500, and there'd be no staff employee to worry about at all.  (Is the pay up at the 401a17 limit?)

Hi Bri

I do not see how 1/2 year would be different than the full year here (other than proration). Are you saying that, if 1/2 year is done, they can also do a PS allocation? I don't think either scenario matters here.

Just thinking out loud for discussion purposes.

I am going to set up a full year 401k+SH and move on. No other contributions.

I see two issues that you need to address:

1. Coverage test. The employee had presumably satisfied minimum age and service conditions prior to the start of the year. However, because they terminated prior to the effective date of the plan, they had no opportunity to make a cash or deferred election, and therefore would not be considered benefiting for the coverage test. However, I think you can solve this by relying on the daily testing method for the coverage test, as on each day prior to the effective date, there were no HCEs benefiting, and on each day after, HCEs were the only employees.

2. Discriminatory timing. This is a facts-and-circumstances test, but the IRS says that if a plan is adopted, amended, or terminated in such a way that the timing of it has the effect of discriminating against current or former NHCEs, then you have a problem. Adopting a new plan right after the sole NHCE is fired could look discriminatory in the eyes of the IRS. Using a short initial plan year, or an off-calendar plan year, might be beneficial here as that way the former employee was not an employee at any point during the plan year. It's hard to say though because there are no clear rules as to what is discriminatory.

Using a short or off-calendar plan year would also let you avoid needing to do a safe harbor plan.

C.B., thanks for the additional comments.

Off calendar plan is not an option especially with deferrals involved, against my rules.

So will look into short plan year but still cannot wrap my head around it on how to avoid the full corporate year.

Since I have no proration limitation here (salary will be around 100k), short year is fine.

There will be no PS, just deferral+SH match.

Thank you and Bri for the comments.