Safe Harbor 401k Plans - Compliance Issues

For small businesses, the Safe Harbor provisions that are available for 401(k) and 403(b) plans can be a tremendous design advantage. Safe Harbor 401k plans are exempt from the ADP (Actual Deferral Percentage) and ACP (Actual Contribution Percentage) tests, and the contributions can meet the top heavy minimum requirements too.

If you would like to get the the basics about Safe Harbor 401k Plans, rather than learn about the compliance issues surrounding them, see our related post, Safe Harbor Plans - 9 Questions Answered.

Yes, Safe Harbor can be a big advantage for plan sponsors. But beware the pitfalls of not following all of the Safe Harbor regulations! Safe Harbor plans still require careful administration to insure that all of the compliance rules are properly followed. At Benefit Resources, we take pride in helping our clients walk through the mine field of regulations that can trip up even the most well-intentioned employer. We’ve listed some “trip ups” to avoid here.

You can Request a Safe Harbor Plan Design Illustration to be made for your company here.

WHAT TYPE OF SAFE HARBOR PLAN SHOULD YOU HAVE? safe harbor 401k plan, safe harbor plan, safe harbor 401k

There are two types of Safe Harbor, and three separate elections available for plan sponsors:

  1. Safe Harbor Match – This is a match of a participant’s elective deferrals
    1. Basic Match formula – 100% match on the first 3% of pay deferred, and 50% on the next 2% deferred. So if an employee defers at least 5% of pay, then the Basic Match is equal to 4% of pay
    2. Enhanced Match formula – 100% match on a minimum of 4% of pay. The match may go as high as 6% of pay.
  2. Non-Elective Safe Harbor – This is a contribution of at least 3% of pay that is allocated to all eligible employees.
    1. Election for the upcoming year may be made before the beginning of the year, or
    2. The employer may delay the commitment to making the contribution until late in the year (special notice requirements apply – see below).

WHAT NOTICES MUST THE EMPLOYEES RECEIVE?

Every Safe Harbor plan sponsor must provide the employees with a notice between 30-90 days prior to the beginning of the plan year, or meeting plan eligibility. This notice must outline which Safe Harbor contribution will be allocated, and additional information about the plan. Don’t trip up! Make sure the plan participants receive their notices timely! Without proper notice, the plan is technically not a Safe Harbor plan, and you lose all of the advantages that come with the Safe Harbor provisions. We recommend that you keep a list of the employees to whom and when you provided the notice.

As mentioned in #2b above, the plan sponsor can let the employees that they MAY be offering a non-elective Safe Harbor for the upcoming year. The notice requirements are still the same! Then 30-90 days before the end of the following year, you should let the employees know whether or not you will be making the Safe Harbor contribution or not. Don’t trip up! A notice is required if you plan to fund the Safe Harbor, but it is recommended to also provide notice if you do not intend to make the contribution. If you do NOT fund the Safe Harbor, then your plan is subject to ADP/ACP testing and top heavy minimum contributions for that year.

WHO IS ELIGIBLE FOR THE SAFE HARBOR CONTRIBUTION?New Call-to-Action

Once an employee is eligible for the Safe Harbor component of the plan, they must receive the Safe Harbor contribution for the year. Don’t trip up! Additional restrictions such as hours worked, or employment on the last day cannot be applied to Safe Harbor contributions.

Eligibility for Safe Harbor ideally should follow the eligibility for the Elective Deferral component of the plan – particularly for plans subject to top heavy minimum contributions. Don’t trip up! An employee can be required to wait no more than one year to become eligible, with semi-annual entry dates to be within the Safe Harbor regulations.

HOW ARE CONTRIBUTIONS TO A SAFE HARBOR 401k PLAN CALCULATED?

The plan document will outline the requirements for funding the Safe Harbor contributions. Options include:

  • Each pay periodRequest a Proposal Today! See what a customized plan can do for you!
    • This helps with cash flow
    • The annual compensation limit does not apply on match funded per pay period
    • Can reduce match for employees who fund sporadically throughout the year
  • Other times throughout the year e.g., monthly, quarterly, semi-annually
    • All pay periods within the elected time must be considered
  • End of the year
    • Required for non-elective Safe Harbor
    • Can be elected for Safe Harbor match even if some funding has happened throughout the year. This creates a “true up” of the annual match for those who may have funded sporadically

Don’t trip up! Follow the terms of the plan document in calculating the Safe Harbor contribution. If you miss a pay period, or calculate the contribution incorrectly you could potentially violate the terms of the Safe Harbor provisions.

CAN AN ADDITIONAL MATCH BE MADE IN ADDITION TO THE SAFE HARBOR?New Call-to-Action

Yes, additional matching contributions within limits may be made to a plan with Safe Harbor provisions. Additional matching contributions may not have any hour requirements or last-day of employment requirements when the plan is Safe Harbor.

  • Discretionary match – if the additional match is discretionary, then it can be calculated on no more than 6% of pay and cannot exceed 4% of total pay. For example, a match of 50% of the first 6% of pay deferred is OK (that would be 3% of total pay), but 75% of 6% of pay would not be OK (that would be 4.5% of total pay)
  • Fixed match – if the plan sponsor commits to a fixed match, then the additional match can be as much as 6% of pay
  • Triple match – You can actually design a plan to have three matches: Safe Harbor match, Fixed match, and discretionary match.

Don’t trip up! An additional match that exceeds the limits imposed by the Safe Harbor regulations can result in the plan having to pass the ACP test.

WHAT ABOUT ADDING A PROFIT SHARING OR EMPLOYER CONTRIBUTION TO A SAFE HARBOR PLAN?

Both 401(k) and 403(b) Safe Harbor plans may allow for discretionary employer contributions in addition to the Safe Harbor contribution. The plan may require up to 1000 hours and employment on the last day of the plan year in order to be eligible for the contribution.

A special feature of the non-elective Safe Harbor is that the contribution made can offset the employer contribution. Don’t trip up! This applies to pro-rata, cross tested and age-weighted formulas, but not integrated formulas.

WHEN MUST A SAFE HARBOR PLAN BE ADOPTED?

To be a Safe Harbor plan, the participants must have the opportunity to save for at least three months. So a calendar year plan must be in place by October 1, in order to take advantage of Safe Harbor provisions for the year.

Don’t trip up! If you start a plan late in the year and don’t meet the 3-month Safe Harbor rule, then it is likely that a top heavy minimum contribution will be required for all (non-owner) participants.

CAN SAFE HARBOR CONTRIBUTIONS BE SUBJECT TO A VESTING SCHEDULE? New Call-to-Action

No. In other words, are Safe Harbor Contributions 100% vested? Yes.

Safe Harbor contributions must be 100% vested at all times. Any discretionary contributions made to the plan may continue to be subject to a vesting schedule.

MAY SAFE HARBOR CONTRIBUTIONS BE WITHDRAWN AT ANY TIME?

No. As with most withdrawal options, a participant must have a “triggering event” to be eligible to receive funds from the Safe Harbor account. Furthermore, Safe Harbor accounts are not eligible for in-service withdrawals prior to age 59 ½.

Check withdrawal requests carefully before authorizing them for payment. Don’t trip up and allow an ineligible withdrawal from your plan.

CAN THE PLAN SPONSOR CHANGE THE SAFE HARBOR MID-YEAR?

No. One of the regulations says that you cannot amend a Safe Harbor plan in the middle of the year. There are some exceptions for terminating a plan, but consider the plan design as “set” for the year and don’t count on making changes mid-year.

Don’t trip up! If you do adopt a provision to eliminate the Safe Harbor provision mid-year, you will be required to pass ADP/ADP and meet top heavy minimum contributions for the year.

SUMMARY

401 k Safe Harbor plans are extremely popular, particularly for small businesses. But don’t think that administering a Safe Harbor plan is simple! There are still a lot of rules to follow carefully, so having a strong TPA like Benefit Resources on your team will give you some peace of mind that you have someone helping you to not trip up. Contact us, if you would like to learn more. Request a Proposal Today! See what a customized plan can do for you!

See also:

Guide to Safe Harbor plans

DOL information on 401ks including Safe Harbor 401k Plans

Edward Jones on Safe Harbor Plans

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Request a Safe Harbor Plan Design Illustration to be made for your company here

 

 

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