Safe Harbor 401(k) Plans
A Safe Harbor 401(k) plan encourages employee participation and provides employers more leniency in setting up plans, without concerns about discrimination in favor of highly compensated employees.
What is a Safe Harbor 401(k) plan?
The Safe Harbor 401(k) is ideal for employers who wish to eliminate the burden of the discrimination testing associated with the traditional 401(k). The Safe Harbor 401(k) allows all employees to contribute up to the maximum yearly deferral ($18,500 for 2015, plus an extra $6,000 if you are age 50 or older) as long as certain “safe harbor” conditions are satisfied.
What are the benefits of a Safe Harbor 401(k)?
- Ease in administration
- Tax-deductible employer contributions
- Beneficialness to the employer that already makes or plans to make contributions or that may be required to make a top-heavy contribution
- Strengthening of the benefit to the employee and the employer that will be realized at retirement
- Maximization of highly compensated employee salary deferrals
- Employer contributions and immediate vesting that encourage participation and may discourage turnover
Who may establish a Safe Harbor 401(k)?
Any employer is eligible to establish a Safe Harbor 401(k).
Who may participate in a Safe Harbor 401(k)?
Both employers and employees may participate in this plan.
How do I start a Safe Harbor 401(k)?
- Adopt a written plan, called the plan document, which outlines its day-to-day operations.
- Identify a plan provider and/or trust for the plan’s assets and investments.
- Select a recordkeeper or recordkeeping system to track contributions, earnings and losses, and distributions. This person or entity will also help prepare the annual return, which must be filed with the federal government.
- Select a third party administrator to maintain the plan document, fulfill daily tasks and ensure compliance with federal regulations. Your financial advisor may choose a third-party administrator and/or recordkeeper on your behalf.
- Provide eligible employees, or plan participants, with a summary plan document (SPD), which is the document that outlines who can participate and how the plan works.
The written plan also provides a central document, or collection of documents, which explains the rights of the employees and employee eligibility for participating in the plan, and enables government agencies to determine whether it satisfies applicable laws.
If the plan allocates responsibilities for performing administrative functions to other parties, such allocation must identify who is responsible for ensuring compliance with the requirements of the tax code, including compliance requirements for loans and distributions.
In the case of funding through multiple financial institutions, the employer may adopt a single written plan to coordinate administration among the financial institutions, rather than having a separate document for each issuer.
New plans: The Safe Harbor 401(k) provisions must be in place for at least three months if you are adopting a new 401(k). So, if you are starting a new calendar year plan, it must be in place no later than October 1 to include the provisions for that first year.
Existing plans: Safe Harbor 401(k) 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. These provisions cannot be changed or eliminated during the year, except if the plan is terminated completely. In the event of termination, the Safe Harbor 401(k) contribution up through the date of termination would still apply.
How does a Safe Harbor 401(k) work?
- It automatically satisfies certain nondiscrimination testing requirements.
- An employer contribution is mandatory, with options that include:
- Matching contributions of 100 percent of the first 3 percent of employee compensation, plus 50 percent of the next 2 percent
- Matching contributions of 100 percent of the first 4 percent of employee compensation
- Three percent nonelective contributions to all eligible employees
- Employer Safe Harbor 401(k) contributions are always 100 percent vested.
- Thirty days’ notice is required to halt contributions.
What are the Safe Harbor 401(k) notice requirements?
The plan document must call for the specific provisions for the Safe Harbor 401(k) contributions, so these provisions will be included in the summary plan description provided to eligible employees. Annually, 30 to 90 days before the beginning of the plan year, the employer must provide employees with a Safe Harbor 401(k) notice.
This notice includes:
- The Safe Harbor 401(k) provisions that will be in place for the upcoming plan year
- A description of other contributions that may be available in the plan:
- The vesting schedule for each different type of contribution
- Withdrawal conditions for each different type of contribution
- An explanation about whether the employee is required to make a contribution to the plan in order to receive the Safe Harbor 401(k) contribution
- A discussion about pre-tax and after-tax (Roth) contributions if Roth is an option in the plan
- A disclaimer that the employer is not required to offer this plan or the Safe Harbor 401(k)
- The name and contact person for the plan if the employee wishes to receive more information about the Safe Harbor 401(k) or the plan in general
Employers must deliver the Safe Harbor 401(k) notices to all employees that are eligible for the plan. Notices may be delivered electronically, by hand or by regular mail. The employer should track the delivery list, method and timing of delivery for his or her records. This information will be requested upon audit by the IRS or the Department of Labor.
Adding Safe Harbor 401(k) and 401(k) provisions to an existing profit-sharing plan: IRS Notice 2000-3 changed the requirements for adding Safe Harbor 401(k) and 401(k) provisions to an existing profit-sharing plan. The plan may add an elective deferral feature and the accompanying Safe Harbor 401(k) contribution to a profit-sharing plan no later than three months before the end of the plan year. The Safe Harbor 401(k) matching or nonelective contribution is required only for the months during which the Safe Harbor 401(k) provisions are effective but may be retroactive to the first day of the plan year if the plan sponsor desires.