A Synopsis of Safe Harbor 401(k) Plans - A Synopsis
Click here to open a downloadable .pdf file of this document.
Overview of Safe Harbor Pension Plans
401(k) plans are normally subject to certain nondiscrimination testing requirements. The test that determines nondiscrimination testing for 401(k) contributions is known as the ADP test. The ADP test is oftentimes failed when Highly Compensated Employees (HCE’s) want to defer a significant amount.
HCE’s cannot make 401(k) salary deferrals at a rate that is determined to be discriminatory by the IRS compared to the rate of deferrals by Non-Highly Compensated Employees (NHCE’s). The consequence of failing the ADP test is that some or all of the HCE’s will receive a portion of their 401(k) salary deferrals back as a corrective distribution. This means that HCE’s can be prevented from enjoying the full benefit of the company’s retirement plan by a lack of participation from NHCE’s.
The IRS has provided an alternative means of satisfying the ADP test, this is known as a “safe harbor”. Under the safe harbor provisions, the requirements of the ADP test are considered to be satisfied even though normal testing results may result in a failure. Generally speaking, when owners and HCE’s desire to “max out” their 401(k) salary deferrals, they will need to implement the safe harbor provisions.
Basic Requirements of Safe Harbor Pension Plans
If an employer wants their plan to enjoy the benefit of the safe harbor plan provision, their plan must satisfy 4 requirements.
1 – Contribution Requirements
Plan utilizing the safe harbor 401k plan provisions must make an employer contribution for that particular plan year with the following guidelines:
- Contributions must be required by the plan
- Contributions must satisfy one of the basic formulas below
- Contributions must be made to all eligible NHCE’s
- Contributions do not have to be made to eligible HCE’s
- Contributions may not have allocation requirements (e.g. 1,000 hours, last day)
- Contributions must be made no later that 12 months after the close of the plan year
o If the employer wants to deduct these contributions, then the contribution must be made no later than the due date (including extensions) of the employer’s tax return.
Formula 1 – Matching Contribution
100% match on the first 3% of compensation deferred, plus
50% match on the next 2% of compensation deferred
| Eligible Participant Deferral | Matching Contribution |
| 0% | 0% |
| 1% | 1% |
| 2% | 2% |
| 3% | 3% |
| 4% | 3.5% |
| 5% | 4% |
Formula 2 – Nonelective Contribution
3% of employee’s compensation
| Eligible Participant Deferral | Nonelective Contribution |
| 0% | 3% |
| 1+% | 3% |
2 – Vesting Requirements
All safe harbor pension plan contributions must be 100% vested at all times, regardless of the employee’s length of service.
3 – Withdrawals
Hardship withdrawals are not permitted with respect to safe harbor 401k plan employer contributions.
4 – Annual Notice
All safe harbor pension plans must provide all eligible employees a written notice with the following conditions:
- It must be provided on an annual basis
- It must be provided no later than 30 days before the beginning of the plan year
- It must satisfy certain content requirements
New Plans
A new 401(k) plan may be established and utilize the safe harbor provisions under the following conditions:
- The safe harbor notice is distributed by the first day of the plan year
- The plan year is at least 3 months long
Conversion Plans
An existing 401(k) plan can implement the safe harbor pension plan provisions under the following conditions:
- The plan is amended to include the safe harbor provisions
- The safe harbor notice is distributed at least 30 days prior to the following plan year
Note: An existing 401(k) plan cannot convert to a safe harbor 401(k) for the current plan year. However, a non - 401(k) plan (e.g. PS only plan) can add a 401(k) feature with the safe harbor provisions for the current plan year.
