The ERISA consultants at the Columbia Management Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. A recent call with a financial advisor in New York is representative of a common question related to the requirements for adopting a safe harbor 401(k) plan. The advisor asked:
“My client has a profit sharing plan and is considering adding a 401(k) safe harbor feature. Does she have a deadline by which she must adopt the safe harbor design for 2013?”
Highlights of Discussion
• Yes, and that deadline is nearly upon us! 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 2013.
• Moreover, the plan sponsor would need to meet employee notice requirements in 2013. 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 give 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, 2013).
• 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.
Conclusion
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 Columbia Management Retirement Learning Center Resource Desk is staffed by the Retirement Learning Center, LLC, a third-party industry consultant that is not affiliated with Columbia Management. For informational purposes only. Please consult a tax advisor or attorney for specific tax or legal needs. © 2013 Columbia Management Investment Advisers, LLC. Used with permission.
