A traditional 401(k) plan must satisfy certain nondiscrimination testing to make sure benefits are equally applied to all employees, from the most highly paid to the lowest paid. These tests must be run at the end of each plan year and, depending on the test results, may limit how much you and your higher-paid employees can contribute to the plan. Running these tests also adds to your administrative burden as the plan sponsor.
You can avoid the nondiscrimination testing by designating your plan as a safe harbor 401(k) plan. To qualify for safe harbor status, your plan must meet the following requirements:
- Employer contributions. You must make one of two types of employer contributions:
- A non-elective contribution to all eligible participants equal to a minimum of 3% of an employee’s pay for the entire year, regardless of when they joined the plan
- A matching contribution equal to 100% of the first 3% of pay that is contributed, and 50% of the next 2% of pay contributed
- As soon as an employee is eligible to make contributions to the plan, they are eligible for the safe harbor provisions
- Guaranteed employer contributions. Once an employee is eligible for the safe harbor provisions, they must receive the employer contributions due them for the year without having to meet any other requirements
- Employees must be immediately 100% vested in all employer contributions.
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). So 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.
Existing plans: Safe Harbor provisions can only be added to an existing plan before the beginning of the plan year, and they must be in effect for the entire year. Safe Harbor provisions cannot be changed or eliminated during the year except if the plan is terminated completely. In the event of plan termination, the Safe Harbor contribution up through the date of termination would still apply.
Below are TRA’s deadlines.
- Safe Harbor – Friday, September 7, 2018
- Cash Balance – Friday, November 30, 2018
- 401(k) / Profit Sharing – Friday, December 7, 2018
- Solo(K) – Friday, December 14, 2018*