Safe Harbor 401(k)

What is a Safe Harbor 401(k)
Safe Harbor 401(k) plans are like traditional 401(k) plans, but they offer advantages to companies at risk of failing the ADP Test and ACP Test.  Because Safe Harbor Plans are deemed to satisfy these tests, business owners and other highly compensated employees can defer the maximum contribution without risk of corrective distributions caused by low participation from non-highly compensated employees
Plan Design
Safe Harbor 401(k) plans can be offered with the same flexible features as traditional plans, including eligibility, participant loans, and distribution options.  Unlike traditional plans, safe harbor plans require fully vested safe harbor contributions

Contribution Options
Like traditional plans, Safe Harbor 401(k) Plans allow employees and employers to make tax-favored contributions to employee retirement accounts. 

Employee contributions.  Employees can make pre-tax salary deferrals, rollover contributions from IRAs and other qualified retirement plans, and catch-up contributions.

Employer contributions.  Unlike traditional 401(k) plans, the employer contributions are not discretionary.  Employers are required to make fully-vested safe harbor contributions on behalf of employees.  Safe harbor contributions can be structured either as safe harbor matching contributions or safe harbor non-elective contributions.  In addition to the required safe harbor contributions, employers can elect to make non-safe harbor contributions that are subject to vesting.

Why Choose a Safe Harbor Plan?

Trouble passing ADP/ACP Test.  Unlike traditional 401(k) plans, Safe Harbor 401(k) plans are generally not subject to the ADP Test and ACP Test.  This allows highly compensated employees to avoid corrective distributions and to defer the maximum contribution, regardless of participation from non-highly compensated employees.

Safe harbor contributions may serve triple duty.  In addition to satisfying the safe harbor requirements, safe harbor contributions can be used to satisfy the top heavy minimum contribution when a plan is top heavy. They can also satisfy the minimum gateway contributions needed to pass the general nondiscrimination test required for new comparability plans.

Employee recruitment and retention.  Because Safe Harbor Plans offer guaranteed employer contributions that are fully vested, these plans are very attractive to employees and are sure to help with employee recruitment and retention.

Tax Savings.  Safe Harbor 401(k) plans offer tremendous tax savings to both employers and employees.  Employers receive tax deductions for making contributions, and employee salary deferrals are made before federal income taxes are withheld.  All contributions grow on a tax-deferred basis. 

Great retirement savings tool.  Like traditional 401(k) plans, safe harbor plans are a disciplined and convenient way to help employees save for retirement.

Important Considerations

Safe Harbor notice requirements.  The IRS requires employers to give a safe harbor notice to each eligible participant 30 days prior to the beginning of the plan year in which safe harbor contributions will be given. 

Maybe Notice.    Safe Harbor Plans can be designed to give employers flexibility each year in deciding the plan's status as a safe harbor plan.  These plans are referred to as "Maybe" or "Wait and See" plans, and require employers to give an annual "Maybe Notice" to participants.  This type plan design requires the employer to fund the safe harbor contribution as a non-elective contribution, not as a safe harbor matching contribution.

Minimum plan year of 3 months.  Safe Harbor 401(k) Plans are required to have a minimum plan year of at least 3 months. This means new plans with a calendar year end must be established before October 1st to be effective for that plan year.

Conversion of existing plans.  Employers currently sponsoring 401(k) or profit sharing plans can generally convert their existing plans to Safe Harbor 401(k) Plans. Profit sharing plans can be converted at any time (except for the 3 month rule mentioned above). However, the conversion of 401(k) plans is not effective until the following plan year for which the required 30 day notice is given.

No service or hours requirement allowed.  Safe Harbor 401(k) Plans cannot impose an employment condition or hours requirement on the receipt of safe harbor contributions.

Safe Harbor contributions are fully vested.  All safe harbor contributions are 100% vested. Any non-safe harbor contributions made to a Safe Harbor Plan can be made subject to vesting.

With a Safe Harbor 401k, the business must make contributions to the business owner, to highly compensated employees and to non-highly compensated employees according to one of the following 3 formulas:
  1. Basic - Match 100% of the first 3% of compensation, plus 50% of the next 2% of compensation.
  2. Enhanced - Match 100% on the first 4% of compensation.
  3. Non-Elective - Contribute 3% of compensation to all eligible employees.