SAFE HARBOR 401(k) PLANS 

Recent regulations have been established for 401(k) plans to simplify nondiscrimination testing while improving the ability to achieve greater contribution levels for your Highly Compensated Employees (HCE).  The general rules of using a Safe Harbor plan are as follows: 

• Maximum 401(k) Contributions are allowed for HCE without regard to deferrals by Non-HCE.  The safe harbor plan eliminates ADP and ACP testing when the plan satisfies the applicable safe harbor requirements.
• Satisfaction of the ADP and ACP test requires an approved safe harbor employer nonelective contribution (profit sharing) or matching contribution.
• Timely notification of a safe harbor plan is mandatory to eligible employees for each year the employer will apply the safe harbor rules.  The notice must be provided at least 30 days before the beginning of the plan year. 
• The plan document must specify the provisions the employer elects as safe harbor options to satisfy the ADP and ACP test. 
• Safe harbor contributions must be 100 percent vested and are subject to the same distribution rules as 401(k) contributions. 
• The safe harbor contributions may be contributed to the Non-HCE only or may include the HCE.  If including the HCE, the benefit becomes greater to the HCE.  
• The Basic Matching Formula is 100% of the employee’s elective deferrals not exceeding 3% of compensation plus 50% of the employee’s elective deferrals in excess of 3% but not exceeding 5% of compensation.  This means that if a participant has elective deferrals of 5%, the matching contribution will be 4% of compensation.  
• The employer has the option of using an Enhanced Matching Formula that is stated in the plan document.  The most common is 100% of the employee’s elective deferrals not exceeding 6% of compensation.  We will discuss the enhanced formula in detail with any employer wanting to contribute more than the basic match level. 
• The employer also has the option of contributing a non-elective contribution equal to 3 percent of compensation to eligible employees instead of a safe harbor matching formula.  
• The safe harbor contribution may allow a free pass on ADP testing, ACP testing and top heavy requirements if no additional contributions are made to the plan. Additional contributions are allowed but may require testing or certain allocation requirements. 

The above highlights are not all-inclusive to the Safe Harbor Plan rules but should be considered a basic overview of the requirements.  Employers interested in the Safe Harbor plan should contact our office to discuss the requirements in more details.