Safe Harbor §401(k) Plans are popular and can be very effective in maximizing the highly compensated employees’ salary deferrals into a §401(k) Plan.  There is a required employer contribution and a 100% vesting requirement.

CONTRIBUTION ISSUES

To be exempt from the Actual Deferral Percentage Test ("ADP Test") found in a Traditional §401(k) Plan, the Employer must chose one of the following 100% vested Employer contributions:

• 3% NONELECTIVE EMPLOYER CONTRIBUTION

1. No allocation requirements may be imposed, such as a 1,000 hour or last-day requirement.
2. 100% vested.
3. Not available for in-service withdrawal before age 59½, even for hardship.
4. Can be used to satisfy top heavy minimum contribution.
5. Can be used towards satisfying cross-testing gateway.  

• MATCHING EMPLOYER CONTRIBUTION A. OR B. BELOW…

A.    BASIC MATCH: 100% of first 3% of compensation deferred by the employee, plus 50% of the next 2% deferred.

1. No allocation requirements may be imposed, such as a 1,000 hour or last-day requirement.
2. 100% vested.
3. Not available for in-service withdrawal before age 59½, even for hardship.
4. Can be used to satisfy top heavy minimum contribution.

B.    ENHANCED MATCH: Matching formula must be at least as generous as the basic formula (for example, 100% of first 4% of compensation deferred by the employee).

1. No allocation requirements may be imposed, such as a 1,000 hour or last-day requirement.
2. 100% vested.
3. Not available for in-service withdrawal before age 59½, even for hardship.
4. Can be used to satisfy top heavy minimum contribution.
5. Rate of match may not increase as deferral percentage increases.

NOTE:   The top heavy minimum contribution is waived for plans using either the safe harbor basic or enhanced matching formula, provided there is no allocation of any other employer contributions including reallocation of forfeitures. Such a plan would actually be exempt from the top heavy rules.

To be exempt from the Actual Contribution Percentage Test ("ACP Test") found in a Traditional §401(k) Plan, the Employer must adhere to the following rules:

A.    One of the Safe Harbor Employer contributions above must be provided.

B.    Once the Safe Harbor Employer contribution is provided, any non-safe harbor matching formula will satisfy the ACP Safe Harbor test if it meets these requirements:

1. Allocation of any discretionary matching contribution cannot exceed 4% of compensation.
2. Deferrals in excess of 6% of employee compensation may not be matched.
3. Rate of match may not increase as deferral percentage increases.
4. Non-safe harbor additional match does not need to be 100% vested.
5. May permit in-service withdrawals.
6. Cannot have a 1,000 hour or last-day allocation requirement for any discretionary match.

IMPLEMENTATION ISSUES

To be exempt from the Nondiscrimination Testing ("ADP/ACP Tests") found in a Traditional §401(k) Plan, the Employer must adhere to the following rules: 

1. New Safe Harbor 401(k) Plan Issues:
   • A safe harbor 401(k) feature may not be added to an existing profit sharing plan with less than three months remaining in plan year.
   • A brand new 401(k) plan must have at least three months remaining in the short plan year to immediately start a safe harbor. For example, by October 1 for a calendar year plan.
   • An exception to the 3 month rule exists for a new business, which may establish a safe harbor plan with one month each in the plan year.
2. A safe harbor feature may not be added to an existing 401(k) plan during the plan year. The plan may be amended to add the safe harbor as of the beginning of the next plan year.
3. A safe harbor notice must be provided each year between 30 and 90 days before the next plan year begins. If the flexible nonelective safe harbor contribution will be made, a second notice must be provided 30 days before the end of the plan year.
4. A safe harbor match may be discontinued during the year upon 30 days advance notice to employees. However, ADP and ACP testing will apply for the entire year.

TOP HEAVY PLAN ISSUES

If the safe harbor 401(k) plan is top heavy, the employer can get twice the mileage out of its safe harbor contribution. There are three ways this can happen:

1. When a Non-Elective Employer Contribution of 3% or more is made to a top heavy plan, the Non-Elective Employer Contribution of 3% or more generally satisfies the top heavy contribution requirement.
2. If the plan is making a safe harbor match and the plan is top heavy, the match counts towards satisfying the top heavy minimum contribution for those employees who receive it.  For example, if a participant defers 2% and receives a 2% match, when the employer makes the top heavy contribution, that participant would only have to receive 1% more to satisfy the 3% top heavy contribution.
3. A plan that only permits elective deferrals and contributions that satisfy the ADP and ACP safe harbor provisions is exempt from the top heavy rules.  To be exempt, there cannot be any other employer contribution ( i.e., profit sharing contribution) and forfeitures cannot be allocated on a basis other than as a match that satisfies the ACP safe harbor.  To further clarify, discretionary matching contributions that do not trigger the ACP test (as described above) may also be made.

Please call Hembree TPA, Inc. at (888) 486-401k or e-mail us at info@hembreetpa.com to establish a new Safe Harbor §401(k) Plan or review an existing Safe Harbor §401(k) Plan.

[Back to top]