Initial 3 month Safe Harbor 401(k Plan Year

New 401(k) Safe Harbor Plan with effective Date October 1, 2018.  Plan Year Ends 12.31.2018 so a 3 month plan year.  According to the regulations the new plan must be in place for 3 months to meet the safe harbor provision:

1.401(k)-3(e)(2) Initial plan year. A newly established plan (other than a successor plan within the meaning of §1.401(k)-2(c)(2)(iii)) will not be treated as violating the requirements of this paragraph (e) merely because the plan year is less than 12 months, provided that the plan year is at least 3 months long (or, in the case of a newly established employer that establishes the plan as soon as administratively feasible after the employer comes into existence, a shorter period). Similarly, a cash or deferred arrangement will not fail to satisfy the requirement of this paragraph (e) if it is added to an existing profit sharing, stock bonus, or pre-ERISA money purchase pension plan for the first time during that year provided that—

(i) The plan is not a successor plan; and

(ii) The cash or deferred arrangement is made effective no later than 3 months prior to the end of the plan year.

Operationally, it has taken a few weeks for the platform recordkeeper, advisor and plan sponsor to get enrollment meetings done and everything in place to start deferrals which will occur with the first payroll in November.

Is Safe Harbor Status negated if the first deferrals do not occur with the first payroll in October?  The regulation language seems to be very broad and does not specify that the first deferral must occur with the first payroll in October.  Although a very conservative interpretation could be taken to mean just that.

so in other words, the owner can still defer 18500 plus 6000 in catch up because he makes bookah bucks, but everyone else is now limited to 2 months of deferrals and we get a free ride on the ADP test

this smells very bad. since it is known it takes a few weeks to get everything going, this should have been taken care of before Oct 1, and not 'oh, its 10/1 lets set up a safe harbor and when we can get deferrals started we will'

I imagine the intent of the regs is that people were able to defer for 3 months not just effective date of 3 month

was a notice given out before hand and when? if Oct 1 were the folks told 'oh by the way, you can't really defer for the first month'. that smells bad too.

Am I reading this right that the plan document was timely adopted and effective on October 1, but deferrals won't be allowed until the first pay date in November? 

If so, you have an operational failure because participants eligible to defer effective October 1 were improperly excluded from the plan from October 1 through the paydate prior to the one where they will first be allowed to defer. 

First, sorry to be blunt, but I suggest the plan sponsor reconsider their choice of service providers who created a qualification issue for the plan before it even gets up and running.  They also need to decide if they can trust those service providers to correct it properly.

Then, the operational failure needs to be corrected under EPCRS.  With the operational failure lasting less than 3 months, they may be able to qualify for the brief exclusion correction in Rev. Proc. 2016-51 Appendix A.05 (9).  At the very least, it will cost the employer the safe harbor contribution that would have been made for the period based on the missed deferrals.  The amount of missed deferrals will depend on when deferral elections were made, since the missed deferral rate is different for an improper exclusion than it is for a failure to implement a deferral election.  Also note that for improper exclusion from a safe harbor plan, there is a deemed rate of missed deferrals that depends on the safe harbor provisions being used.  After proper correction, the plan will no longer have qualification issues from the failure and will still be safe harbor.