The Pension consultants at Planmark regularly receive calls on a broad array of technical topics related to qualified retirement plans. A recent call with a plan sponsor in Atlanta is a commonly asked question about Safe Harbor 401(k) plans. The plan sponsor asked:
“Our company has a profit sharing plan and thinking about adding a 401(k) safe harbor provision. Is there a deadline for adding this feature to our existing plan?”
Highlights of Discussion
Yes, and that deadline is near! An existing profit sharing plan can be converted to a safe harbor 401(k) plan during the current year as long as the plan will function as a safe harbor 401(k) plan for at least three months (Treas. Reg. 1.401(k)-3(3)(2)).
That means the effective date of the amendment for the profit sharing plan would need to be October 1 in order to incorporate the 401(k) safe harbor into the profit sharing plan for 2016.
Moreover, the plan sponsor would need to meet employee notice requirements in 2016. Generally, a plan sponsor must give each eligible employee a written notice of rights and obligations under the safe harbor 401(k) plan within a reasonable period before the beginning of the plan year. Plan sponsors are deemed to satisfy this if at least 30 days and no more than 90 days before the beginning of each plan year they provide the notice. In your case, because employees will be newly eligible, 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 (i.e., Oct. 1, 2016).
Please note that a plan sponsor may not add a safe harbor feature to an existing 401(k) plan during the current year. The plan may be amended to add the safe harbor as of the first day of the next plan year.
The rules for incorporating a 401(k) safe harbor feature into an employer’s plan can be tricky. For example, employers that currently sponsor profit sharing plans have the option of converting their plans to safe harbor 401(k) plans if they do so no later than October 1 of the current year, and meet corresponding employee notice requirements. Financial advisors who understand the finer details of plan establishment are better positioned to support their plan sponsor clients and identify opportunities.
The Resource Desk is staffed by the pension experts at Planmark Financial Group, LLC a third-party plan administration firm. Any information provided is for informational purposes only. It cannot be used for the purposes of avoiding penalties and taxes. Planmark does not provide tax or legal advice.
Consumers should consult with their tax advisor or attorney regarding their specific situation.