Safe Harbor 401(k)
What is a Safe Harbor 401(k) Plan?
A safe harbor 401(k) plan is similar to a traditional 401(k) plan, but, among other things, it must provide for employer contributions that are fully vested when made. These contributions may be employer matching contributions, limited to employees who defer, or employer contributions made on behalf of all eligible employees, regardless of whether they make elective deferrals. The safe harbor 401(k) plan is not subject to the complex annual nondiscrimination tests that apply to traditional 401(k) plans.
Safe harbor 401(k) plans that do not provide any additional contributions in a year are exempted from the top-heavy rules of section 416 of the Internal Revenue Code.
Employers sponsoring safe harbor 401(k) plans must satisfy certain notice requirements. The notice requirements are satisfied if each eligible employee for the plan year is given written notice of the employee’s rights and obligations under the plan and the notice satisfies the content and timing requirements.
In order to satisfy the content requirement, the notice must describe the safe harbor method in use, how eligible employees make elections, any other plans involved, etc. Income Tax Regulations section 1.401(k)-3(d)(2), contains information on satisfying the content requirement using electronic media and referencing the plan’s Summary Plan Description.
The timing requirement requires that the employer must provide notice within a reasonable period before each plan year. This requirement is deemed to be satisfied if the notice is provided to each eligible employee at least 30 days and not more than 90 days before the beginning of each plan year. There are special rules for employees who become eligible after the 90th day. See Income Tax Regulations section 1.401(k)-3(d)(3).
Both the traditional and safe harbor plans are for employers of any size and can be combined with other retirement plans.
What are the potential benefits of a Safe harbor plan?
Safe harbor plans generally don’t require the following compliance tests:
- Actual deferral percentage (ADP). A test for pre-tax elective and/or Roth deferrals by highly compensated employees (HCEs) to a 401(k) plan exceeding the maximum amount permitted under nondiscrimination testing rules for a plan year. The test compares HCE with non-HCE contributions to determine whether HCEs have exceeded certain thresholds.
- Actual contribution percentage (ACP). A test for employee after-tax contributions or employer matching contributions by HCEs to a 401(k) plan exceeding the maximum amount permitted under nondiscrimination testing rules for a plan year. The test compares HCE with non-HCE contributions to determine whether HCEs have exceeded certain thresholds.
- Top-heavy plan. A test measuring the degree to which certain officers and owners dominate a 401(k) plan. A top-heavy plan essentially favors officers and owners over other employees.
Safe harbor provisions can help:
- Reduce plan maintenance by eliminating annual testing requirements and the obligation of maintaining a vesting schedule.
- Maximize deferrals for highly compensated employees.
- Relieve a plan’s top-heavy status.
- Provide additional employee benefits with profit-sharing or matching contributions.
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