Safe Harbor 401(k): Establishing The Plan

Safe Harbor 401(k)

Establishing The Plan


Establishing a Safe Harbor 401(k) Plan

Does passing these tests seem like a bit of a pain? If so, a Safe Harbor 401(k) might be a better way to go because it generally allows your plan to skip them altogether.

Safe Harbor plans require that your plan creates incentives to encourage more of your employees to take advantage of your 401(k). This requirement is important because Americans are abysmal at saving for retirement. According to the Economic Policy Institute (EPI), close to half of all American families don’t have any retirement savings, and among families nearing retirement, the median savings is only $17,000.

In exchange for letting your plan avoid nondiscrimination testing, you’ll have to follow some rules to make sure your plan benefits all your company’s employees.

Requirements for a Safe Harbor 401(k)

The main requirement for a traditional Safe Harbor 401(k) is that the employer must make contributions and those contributions must vest immediately. Contributions can take three different forms, the first two of which are matching, which means employees must defer funds to their accounts in order to receive contributions. The third option requires your company to make a contribution, even if employees don’t defer any of their income into their plan.

Here are the contribution minimums under different plan types:

  • Basic matching: The company matches 100% of all employee 401(k) contributions, up to 3% of their compensation, plus a 50% match of the next 2% of their compensation
  • Enhanced matching: The company matches at least 100% of all employee 401(k) contributions, up to 4% of their compensation (not to exceed 6% of compensation)
  • Non-elective contribution: The company contributes at least 3% of each employee’s compensation, regardless of whether employees make contributions

This is what the matching and nonelective contributions would look like for an employee under the three different Safe Harbor formulas. The employee in this case is Winterfell Consulting’s Jon Snow, who earned $150,000 of income on his W-2 form during the plan year:

Note that these contributions are only the minimums. For example, if a more generous employer matched up to 6% of employees’ pay, it would still qualify as Safe Harbor.

Additional Safe Harbor requirements

Making contributions to your employees’ 401(k) is the most notable Safe Harbor requirement, but there are additional rules surrounding when and how you offer your plan.

Safe Harbor deadlines

For new plans, October 1 is the final deadline for starting a new Safe Harbor 401(k). But, don’t wait to set up your plan a few days before the deadline because you’re also required to notify your employees 30 days before the plan starts and it can take a week or more to set up your plan. So, make sure you talk to your administrator well before September 1.

If you want to add a Safe Harbor provision to an existing 401(k), your administrator can make a plan amendment that does into effect January 1 of any year. Remember, there is an employee 30-day notice requirement, and it may take some time for your administrator to amend the plan, so try to get this taken care by the end of November to go into effect January 1.

Each eligible employee must be notified in writing about their rights and obligations under the plan annually. Notice must be given within a reasonable amount of time — at least 30, but not more than 90 days — before the beginning of the plan year.

Making mid-year changes to a Safe Harbor plan

If you already offer a Safe Harbor 401(k) plan but would like to make changes, there are special rules that you need to follow. All the details for mid-year changes are included in IRS Notice 2016-16, but these are the basic things the IRS requires:

  • Give employees an updated Safe Harbor notice that describes any changes. Notice should be given 30 to 90 days before the changes go into effect.
  • Give each notified employee at least 30 days to change their cash or deferral election.
  • A combined notice may be provided.

Once you’ve satisfied the notice rules above, you may be able to make changes to certain aspects of the plan including, for example, increasing future safe harbor non-elective contributions from 3% to 4%, or changing the plan entry date for eligible employees from monthly to quarterly.

Several types of changes are not permissible during the year, however, so review the rules carefully if you wish to amend your plan.


Find out if a Safe Harbor 401(k) makes sense for your business,
contact Vermillion Financial Advisors today.

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