The Safe Harbor Plan Design Election

If you would like your company’s highly compensated employees (HCEs) and Key employees (company owners, lineal relatives of owners and company officers) to have the ability to defer the maximum amount allowed by law, you may want to consider adopting a Safe Harbor plan design. 

Retirement plans like the 401(k) plan are regulated by the IRS and Department of Labor.  The IRS requires annual plan non-discrimination testing to ensure that HCEs and KEY employees of the company do not contribute a disproportionally higher amount than the rank and file employees. By adopting a Safe harbor plan design your plan will be exempt from certain nondiscrimination tests - ADP/ACP and Top Heavy. 

To qualify as a safe harbor plan you must meet the following conditions: 

1. You must provide an employer contribution that complies with a specific “safe harbor” formula.

2. The employer contribution must be 100% vested unless you elect a *Qualified Automatic Contribution Arrangement (QACA) in which case you can elect a 2-year cliff vesting (100% vesting after two years of service).

3. Employees must be notified annually at least 30 days before the beginning of the next plan year or 30 days before the provision goes into effect

4. The safe harbor election must be in effect for the entire plan year or the safe harbor status will not be in effect and the plan will be subject to ADP/ACP and Top Heavy Testing.

Contribution Requirement

Employer must make either a safe harbor matching contribution or a safe harbor non-elective contribution.

1. A safe harbor matching contribution must equal at least 4% of employee’s eligible compensation by using one of these formulas: (Matching contribution will be calculated and funded per pay period)

   1. 100% of the first 3% of compensation plus 50% of the next 2% of compensation

   2. 100% of the first 4%, 5% or 6% of compensation

2. A safe harbor non-elective contribution that equals at least 3% of employee’s eligible compensation for the plan year. A contribution greater than 3% is allowed.

Notification Requirement

Each participant must receive a written notice describing the safe harbor option the employer will use for the plan year. The notice must be provided prior to the plan effective date.

Vesting Requirement

Safe Harbor contributions are immediately 100% vested unless you elect a * Qualified Automatic Contribution Arrangement (QACA) in which case you can elect a 2-year cliff vesting (100% vesting after two years of service).

* Qualified Automatic Contribution Arrangement (QACA) Requirements

QACA is a Safe Harbor plan design which means all the requirements already described apply, with the addition of these requirements:

1. Plan must have an Automatic Enrollment feature. 

2. In addition to the previously described required Employer contribution options, QACA provides for a matching contributions equal to 3.5% of employee’s eligible compensation.

   1. 100% of the first 1% of compensation plus 50% of the next 5% of compensation.

3. Employer contribution can be subject to a 2-year cliff vesting schedule (100% vesting after 2 years of service). 

New 401(k) plans

A company that adopts a 401(k) plan for the first time may not be a safe harbor plan for the first year unless the first plan year is at least three months in duration. This means the latest a company can adopt a plan and be safe harbor is October 1^st.