Terminating a Safe Harbor 401(k)
Rev. 06/21/10; E-mail Alert 2010-9

Termination Due to Merger, Acquisition or Business Hardship
A safe harbor 401(k) plan may have a short plan year in the year the plan terminates and remain in the safe harbor from ADP and/or ACP testing, provided the termination is in connection with a merger or acquisition involving the employer, or if the employer incurs a substantial business hardship as defined in section 412(d) (for a minimum funding requirement waiver):

• the employer is operating at an economic loss,
  
• there is substantial unemployment or underemployment in the trade or business and in the industry concerned,
  
• the sales and profits of the industry concerned are depressed or declining, and
  
• it is reasonable to expect that the plan will be continued only if the waiver is granted.
  

The employer in any of the above situations will remain safe harbored from testing, provided a safe harbor contribution is made for the short plan year.

Note that if the plan were not being terminated and the 2009 proposed rules for stopping a safe harbor guaranteed nonelective were being followed, the ADP/ACP test would have to be performed.

Short Plan Year Plan Termination for Other Reasons
A safe harbor 401(k) plan may have a short plan year in the year the plan terminates for reasons other than merger, acquisition or hardship. However, ADP/ACP testing will be required to be performed. Testing will be done using the current year method.

Other Issues

• In these short plan year scenarios, the employer will have to make the safe harbor contributions for the short plan year period.
• The employees are to be provided with a supplemental notice of the change.
  

For more information, check out our "Safe Harbor 401(k)s: Design and Correction" eSeminar by clicking here.