UPDATED: Safe Harbor 401k Plans - 10 Questions Answered

Updated for changes made by the Setting Every Community Up for Retirement (SECURE) Act passed in late 2019

Safe Harbor 401(k) Plans are very popular with business owners and plan participants alike.  The Safe Harbor 401(k) provisions have some very big benefits and a few drawbacks.  This article outlines the rules for Safe Harbor 401(k) plans and 403(b) plans to help a business owner decide if this design is right for you.

1. WHAT ARE SAFE HARBOR 401k PLANS?
The Safe Harbor rules are designed for 401(k) and 403(b) plans. These rules call for a company to make a specific, mandatory contribution to each participant in the plan that is immediately 100% vested to the participant. If the rules are followed, a Safe Harbor 401(k) or 403(b) plan is allowed a free pass on the Actual Deferral Percentage (ADP) test, the Actual Contribution Percentage (ACP) test, and the Top Heavy minimum contribution.

2. WHAT SIZE COMPANY SHOULD CONSIDER A SAFE HARBOR PLAN?
Any size company can adopt Safe Harbor 401(k) provisions. Plans that have trouble passing the ADP or ACP tests or are top heavy and subject to the minimum contribution requirement are ideal candidates for adopting Safe Harbor provisions.
safe harbor 401k plans
3. MY CORRECTIVE DISTRIBUTIONS ARE SMALL BUT STILL ANNOYING; DO I NEED A SAFE HARBOR?
Maybe not! A Qualified Non-Elective Contribution (QNEC) or Qualified Matching Contribution (QMAC) may be determined each year to correct for a failed ADP or ACP test and, while also immediately vested to the participant, may be smaller than the Safe Harbor contribution would be. Top heavy minimum contributions still must be met for plans with this status, though, so a holistic review of the plan should be performed.

4. WHAT CONTRIBUTIONS MUST THE COMPANY MAKE TO A SAFE HARBOR 401(k) PLAN?

In a Safe Harbor plan, the employer elects to make one of two types of immediately-vested contributions:

1. A non-elective contribution to all eligible participants:

  • a minimum of 3% of pay
  • a “maybe” election is an option (see Question 5 below for more information)
  • may be adopted by an existing plan as late as 30 days prior to the end of the plan year (December 1 for calendar year plans)
    • this deadline may be extended to the due date of the sponsor's tax return the following year but the safe harbor contribution is increased to 4% in this case
    • an "existing plan" in this case means one that has already completed its first plan year

2. A matching contribution under one of the formulas listed below (a match is allocated only to employees who defer their own pay to the plan)

  • Basic Match:
    • maximum contribution equals 4% of pay, requires participants defer at least 5% of pay
    • represents the minimum safe harbor match formula
  • Enhanced Match:
    • 100% of the first 4% of pay that is contributed to the plan (may be increased up to 6%)

PLEASE NOTE: IF YOU WANT TO SET UP A NEW SAFE HARBOR PLAN OR CONVERT YOUR EXISTING PLAN THIS YEAR  YOU MAY HAVE AN UPCOMING DEADLINE TO CONSIDER - please contact us immediately so we have enough time to put the proper documents in place

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5. WHAT IF I DON’T KNOW IF I NEED THE SAFE HARBOR PROTECTIONS EVERY YEAR?
There is a twist on the non-elective Safe Harbor which allows a company to elect to choose to apply the Safe Harbor provision each year, called the Safe Harbor “maybe.” The company would declare and notify their participants of this election as follows:

  • A non-elective Safe Harbor “maybe” notice is issued to eligible participants prior to the beginning of the plan year advising that the election will be confirmed at a later date.
  • If the Safe Harbor provision is elected for the year, another notice must be provided 30-90 days before the end of the plan year stating this intent.
  • If the Safe Harbor provision is not elected, no further action is required until it’s time to advise of the “maybe” election for the following year.

6. WHAT CONTRIBUTIONS MUST THE COMPANY MAKE TO A SAFE HARBOR 401(k) PLAN?
All Safe Harbor plans are required to make contributions to eligible participants who make deferral contributions during the year. If the non-elective Safe Harbor provision is in place all eligible employees will receive a contribution, whereas Safe Harbor match plans limit mandatory contributions only to employees who elect to defer.

Get the Ultimate Retirement  Plan Toolkit!  (4 white papers included!)7. ARE ADDITIONAL CONTRIBUTIONS ALLOWED IN A SAFE HARBOR 401(k) PLAN?
Yes, the company may also make discretionary matching and/or profit sharing contributions as allowed by their plan document and considering the following:

  • Additional discretionary match contribution formulas applying for the ACP test safe harbor must be restricted to one which:
    • is not conditioned to provide a benefit on deferrals which exceed 6% of pay, and
    • does not yield a benefit which exceeds 4% of pay
  • Additional fixed match contribution formulas applying for the ACP test safe harbor must be restricted to a match which yields a benefit which does not exceed 6% of pay
    • These match benefits are defined in the plan document and represent a commitment/mandatory contribution to the plan
  • The match formula may not increase with the amount deferred (e.g., 50% on the first 2% of deferrals and 100% on the next 2% of deferrals, 100% on deferrals between 4 and 6%)
  • There can be no “last day of service” or hours requirements to be eligible for the additional matching contribution
    • These requirements are also called "allocation conditions" and typically do not apply to contributions funded each pay period
  • Profit Sharing contributions may be made as designed in the plan document
    • Safe Harbor non-elective contributions may be used to offset contributions allocated under certain profit-sharing allocation formulas
  • Additional non-Safe Harbor or corrective contributions, whether match or profit sharing, may be subject to a vesting schedule

8. WHEN CAN SAFE HARBOR PROVISIONS BE ADOPTED?
New plans: The Safe Harbor provisions must be in place for at least 3 months if you are adopting a new 401(k) or 403(b) plan. In other words, if you are starting a new calendar year plan the plan must be in place no later than October 1 to include Safe Harbor provisions for that first plan year. Request a Free Consultation Here! 

Existing plans: Safe Harbor match provisions can only be amended into an existing 401(k) plan before the beginning of the plan year. Safe Harbor non-elective provisions may be adopted as late as the due date of the sponsor's tax return (see Question 4 above for more details). Profit sharing plans with no 401(k) provision may choose to adopt a Safe Harbor along with a new 401(k) provision mid-year as long as they follow the timing restrictions for new plans.

9. MAY I ELIMINATE OR CHANGE MY SAFE HARBOR PROVISION DURING THE YEAR?
Yes.  Whether or not it is advisable to do so, though, is another question! NOTE: All scenarios below require advance notice to all eligible employees 30 days in advance of the amendment taking effect and the plan may not depend on the deemed pass on the ADP, ACP, or top heavy test.

Scenario #1 Ditching the Safe Harbor Match: In this scenario, match contributions prescribed under the Safe Harbor provision remain required until the date the amendment is effective. Safe Harbor contributions may be treated as QMACs, however, to assist with the ADP and ACP test.

Scenario #2 Ditching the Safe Harbor Non-Elective: In this scenario, non-elective contributions prescribed under the Safe Harbor provision will be based on compensation earned until the date the amendment is effective. Safe Harbor contributions may be treated as QNECs, however, to assist with the ADP and ACP test.

Scenario #3 Converting from a Safe Harbor Match to Non-Elective: In this scenario, match contributions prescribed under the Safe Harbor provision remain required until the date the amendment is effective and the non-elective contributions prescribed by the new Safe Harbor provision will be based on compensation earned over the entire plan year. If considering this move, we recommend you do so very early on in the year!

In case you were wondering, plan terminations are not considered a mid-year change so rest assured you will get all the protections you expect even if your plan doesn't make it through the year!


See the IRS 401k Plan Fix-it Guide (including Safe Harbor Plans)

10. WHAT ARE THE SAFE HARBOR NOTICE REQUIREMENTS?

NOTE:  Safe Harbor Non-Elective plans may no longer be required to issue their notice! Unless the plan does not seek a deemed pass on the ACP test and/or match contributions are not available to the plan (like many 401(k)/pension combination plans, perhaps), we recommend issuing the notice anyway. This is because without the notice, the plan loses its ACP test protections for that year.

Annually, 30-90 days before the beginning of the plan year, the employer must provide a Safe Harbor Notice to the employees. This Notice includes the following:

  • The Safe Harbor provisions applicable for the upcoming plan year
    • A description of other contributions that may be available in the plan along with the applicable vesting schedule
  • Withdrawal conditions and a list of the money types available for each
  • An explanation about whether the employee is required to make a contribution to the plan in order to receive the Safe Harbor contribution
  • A discussion about pre-tax and Roth contributions (if available)
  • A disclaimer that the employer is not required to offer this plan or the Safe Harbor

The name and contact person for the plan if the employee wishes to receive more information about the Safe Harbor or the plan in general

Employers must deliver the required Safe Harbor notices to all employees who are eligible for the plan. Notices may be delivered electronically via specific mediums, by hand, or by regular mail. The employer should track the delivery list as well as the method and timing of delivery for their records. This information may be requested upon audit by IRS or DOL.

 

SUMMARY

A significant portion of our clients elect the Safe Harbor provisions to avoid the corrective distribution of deferrals to owners and other employees deemed to be Highly Compensated while also satisfying the top heavy minimum contribution many are required to provide. Top heavy plans that use a discretionary match each year in particular should consider Safe Harbor protections to avoid top heavy minimum contributions if the immediate vesting isn’t as important to the plan sponsor. Any plan struggling with the ADP test that makes a regular profit sharing contribution of 3% or more to max out key employees should consider a non-elective Safe Harbor provision; remember only the first 3% would vest right away which means the remainder of the contribution may be subject to vesting. If you would like to discuss Safe Harbor options, or see how Safe Harbor might benefit your plan, simply click here to request a proposal from our retirement consultants. A Safe Harbor 401(k) plan isn’t for everyone, but it may be right for you!

 

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You might also like:

Top Heavy Plan Questions (For Safe Harbor) - Part 2

The Dangers of a DIY Retirement Plan

7 of the most common mistakes when setting up a retirement plan

How to get a retirement plan set up

Edward Jones' take on Safe Harbor

 

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