What is a Safe Harbor Plan?
A safe harbor 401(k) plan is a specific type of retirement savings plan that is built to encourage employee contribution and participation that was developed under the Small Business Job Protection Act of 1996. This act provided 401(k) plans with alternative, simplified methods of meeting the certain non-discrimination requirements that, as a general rule, 401(k) plans must satisfy. When a 401(k) plan adopts one of the alternative methods, it is known as a safe harbor plan. Adopting a same harbor 401(k) plan design allows an employer to avoid discrimination testing of employee elective deferrals and/or employer matching contributions (ADP/ACP testing).
WHAT ARE THE REQUIREMENTS FOR A SAFE HARBOR PLAN?
The primary benefit of a safe harbor 401(k) plan is that the plan is deemed to automatically satisfy the ADP and ACP tests. However, there are a number of requirements that this type of plan must meet, including minimum employer contributions, immediate vesting and participant notifications.
ARE THERE DIFFERENT DESIGN OPTIONS FOR A SAFE HARBOR PLAN?
The Pension Protection Act (PPA) provided new incentives for implementing automatic enrollment in 401(k) plans, including a safe harbor automatic enrollment program known as a “qualified automatic contribution arrangement” or QACA. Along with the usual benefits of safe harbor rules, the QACA options offer exemption from nondiscrimination testing and top heavy testing, and a two-year vesting schedule for employer contributions.
Safe Harbor Contribution Requirement for Plans with Qualified Automatic Contribution Arrangement
These safe harbor plan designs require 100% vesting after 2 years of employment.
- 3% (non-elective employer contribution – “NEC”) of salary for all eligible employees, or
- An employer matching contribution which results in a minimum match of 100% of the employee’s contributions up to 1% of salary plus 50% of the employee’s contributions that exceed 1% of salary but do not exceed 6% of salary.
Safe Harbor Contribution Requirement for Plans without Qualified Automatic Contribution Arrangement
These safe harbor plan designs require 100% immediate vesting.
- A 3% (non-elective employer contribution – “NEC”) of salary for all eligible employees, or
- An employer matching contribution which results in a minimum match of 100% of the employee’s contributions up to 3% of salary plus 50% of the employee’s contributions that exceed 3% of salary but do not exceed 5% of salary.
Employer contributions that are utilized to satisfy the safe harbor will only be able to be distributed under the same circumstances that apply to 401(k) contributions – generally termination of service, attainment of age 59-1/2, death or disability.
What is a Qualified Automatic Contribution Arrangement (QACA)?
QACA allows an employer to enroll its employees and make salary reductions without having employees complete the enrollment process. A 401(k) plan offering the QACA feature would be eligible for safe harbor treatment if certain contribution and vesting requirements are met.
- A qualified percentage – an automatic deferral for eligible employees of at least 3% and not more than 10% increasing 1% per year so that after three years, assuming the starting percentage is 3%, eligible participants will be contributing 6%
- A matching employer contribution of 100% of the first 1% and 50% of the next 5% or a 3% non-elective to all eligible non-highly compensated employees.
- A notice requirement described in 401(k)(13)(E)(i).
Other provisions include:
- In determining “eligible employees” for purposes of the automatic deferral, plan sponsors with existing automatic enrollment features can exclude eligible employees who already participate or who have elected not to participate
- Employer contributions are 100% vested after 2 years of service
- The 401(k) withdrawal restrictions apply
What are the requirements for participant notices?
All safe harbor 401(k) plans require the employer to provide an employee notice within a reasonable time period (generally 30 days) prior to the start of the plan year. This notice must contain the details of the employee’s rights and obligations. It must contain
the basic features of the plan, including the safe harbor contribution to be provided and rules relating to elective deferrals, vesting, withdrawals and other contributions.
If I want to eliminate the safe harbor match in the plan, what am I required to do?
A safe harbor match can be eliminated with a 30-day written notice to plan participants. If the safe harbor match is eliminated, the plan will be subject to ADP/ACP testing for the entire plan year. A safe harbor 3% basic contribution cannot be eliminated during the
How can I establish a safe harbor plan?
A 401(k) plan can be established as, or amended to become, a safe harbor plan. Generally, safe harbor provisions must be in effect for the entire plan year. If establishing a new plan – safe harbor 401(k) plans are required to have a minimum plan year of at least 3
months. Therefore, new plans with a calendar year-end must be established before October 1st to be effective for that plan year.
If converting an existing plan – employers currently sponsoring 401(k) or profit sharing plans can generally convert their existing plans to safe harbor 401(k) Plans. Profit sharing plans without 401(k) provisions can be amended mid-year subject to the 3 month rule requirement. The conversion of 401(k) plans is not effective until the following plan year for which the required 30 day notice is given.
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