Safe Harbor
Premier Pension Solutions
Safe Harbor 401(k) Plans

Safe Harbor 401(k) plans are similar to traditional 401(k) plans, but offer advantages to companies having trouble passing the nondiscrimination testing, namely the ADP/ACP test.

The limits on employee contributions have been increased over the years, but the 401(k) discrimination test has often limited the ability of highly compensated employees to contribute the maximum allowable. The ADP/ACP test requires the employer to compare the average contributions made by the highly compensated employees (HCE) with the average contributions made by all other employees (NHCE).  If the average contributions by the HCEs exceed the average contributions by the NHCEs by more than a certain allowable amount, then the excess contributions by the HCEs must be returned to them as taxable compensation. HCEs are usually unhappy about the return of additional taxable income especially if they have already filed their tax returns for the year to which the additional income applies.

The beauty of the safe harbor plan is that for the price of a safe harbor employer contribution, the discrimination tests that apply to employee deferrals (ADP) and matching contributions (ACP) are deemed satisfied and, thus, the HCEs may make the maximum allowable deferral without the need for the plan to pass the discrimination tests.

A safe harbor plan has some additional requirements over traditional 401(k) plans.  The additional requirements are: 
  1. The employer must provide employees with written notice every year of the safe harbor rules.

  1. The employer must make a mandatory contribution every year.  This contribution must be 100% vested and not be available for withdrawal for employees until after age 59 1⁄2 or termination of employment. The safe harbor contribution can be either of the following:
    • A matching contribution of 100% on the first 3% of compensation deferred and a 50% match on deferrals between 3% and 5%.

    • A contribution of 3% of the compensation of each eligible employee regardless of whether the employee contributes.
Safe harbor 401(k) plans represent an excellent benefit for HCEs, but may require the employer to make financial commitments that may be in excess of their current commitments. 

Plan must be established prior to the first day of the plan year for which the safe harbor provisions are to be effective. For a new 401(k) plan or the conversion of a profit sharing plan, the plans must be established prior to October 1 for a calendar year plan.

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