It may be advantageous for a plan sponsor to consider adopting a safe-harbor design for their 401(k) plan. Adopting a safe-harbor 401(k) plan design permits an employer to essentially avoid discrimination testing (the testing is deemed met). Remember, this testing limits highly compensated employees’ contributions based upon non-highly compensated employees’ contributions. By making a safe-harbor contribution, highly compensated employees can defer the maximum amount allowed by their plan and Internal Revenue Code limits, without receiving any refunds. General rules for all safe-harbor contributions include the following:
- Safe-harbor contributions are 100% vested.
- There may be no allocation requirements imposed on safe-harbor contributions, for example, a 1,000-hour service requirement or a last-day employment rule.
- Safe-harbor contributions may be used toward satisfying the top-heavy plan minimum contribution requirement.
- All eligible participants must receive a written notice describing the applicable safe-harbor provisions between 30 and 90 days before the beginning of the plan year. This notice must be provided for each year the plan will be safe-harbored.
Generally, there are two types of safe harbor contributions: 1) the nonelective contribution, which is a 3% contribution to all eligible participants, or 2) a matching contribution to participants who are contributing to your plan. The matching contribution offers two options from which employers can choose: the basic or the enhanced match. The basic safe-harbor matching contribution is defined as a 100% match on the first 3% of compensation deferred, and a 50% match on deferrals between 3% and 5% of compensation. Alternatively, the employer may choose an enhanced matching formula equal to at least the amount of the basic match; for example, 100% of the first 4% deferred. That being said, employers wishing to explore a safe-harbor solution should also be aware that it may entail more cost (if their present contribution structure is less than the required safe-harbor required structure).