Safe harbor 401(k) plan
originally posted: 11/22/2006 reposted: 2/18/2011 This post has not been recently reviewed or revised by the author and may be out of date. If in doubt, please send a new question or ask for an update.
Q: We are planning to implement the Safe Harbor provision in our 401(k) plan to avoid Highly Compensated Employee restrictions. I understand that this has to be put in place by December 1 of this year to apply to 2007. At the same time we are having merger discussions with another company who has an employer contribution 401K Plan. If we merge would our employees fall under their plan and the old plan with the Safe Harbor provision go away?
A: Employers have a wide degree of latitude in determining how to combine benefits plans in a merger. The DOL and tax laws are primarily designed to ensure that pension plans are not "raided" in mergers and that vested benefits are not unfairly denied to workers. Other than that, the 401(k) plan can probably be reformatted as the employer wants. As a practical matter, it is likely that the two plans will remain for some time after the merger since it takes some time (perhaps the rest of the plan year) for the plan administrator to complete a merger of the plans. The December 1 notification you refer to is simply designed to give employees a "head's up" about what the employer intends to do with regard to contributions in the plan next year. This gives employees time to react in a manner that, hopefully, allows them to adjust budgets and withholding gain the maximum benefit from the 401(k).
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