What is a Safe Harbor 401(k) Plan?
Employee deferral and employer match contributions to a 401(k) plan must comply with non-discrimination rules. Annually, the average of the deferral rates of Highly Compensated Employees (HCEs) is compared with that of the Non-highly Compensated Employees (NHCEs) and, if the spread between the two averages is too great, corrective steps (often refunds to HCEs) are required. This comparison is referred to as the Average Deferral Percentage (ADP) test. A similar test is performed on the employer match (as a rate of pay), referred to as the Average Contribution Percentage (ACP) test.
However, there are “safe harbor” design options that, when incorporated into a 401(k) plan, effectively allow the plan to bypass the ADP test and, potentially, the ACP test. The main tenet of the safe harbor includes a commitment by the plan sponsor to make an employer contribution that vests at an accelerated rate.
Safe Harbor Options to Bypass the ADP and ACP Tests
- Safe Harbor Matching Contribution: NHCEs must be provided with a 100 percent match on the first 3 percent of compensation deferred, plus a 50 percent match on the next 2 percent of compensation deferred.
- Auto-enrollment Safe Harbor Matching Contribution: NHCEs must be provided with a 100 percent match on the first 1 percent of compensation deferred, plus a 50 percent match on the next 5 percent of compensation deferred.
- Safe Harbor Non-elective Contribution: Participating NHCEs must be provided with a contribution of at least 3 percent of their compensation, regardless of whether they deferred or not.
Each of these options may be supplemented by a discretionary, or fixed, matching contribution that either meets the safe harbor requirements for automatic passage of the ACP test, or is subject to ACP testing. Automatic passage of the ACP test is conditioned on the following requirements:
- deferrals in excess of 6 percent of compensation cannot be matched,
- the matching contribution may not exceed 4 percent of compensation (not applicable to a fixed matching contribution),
- the rate of match cannot increase as the rate of deferral increases, and
- there cannot be any requirements for participants to share in the matching allocation, such as a year-end employment requirement.
Safe Harbor 401(k) Implementation Deadline – October 1, 2019
401(k) plans providing for a safe harbor component must be implemented no later than October 1st, 2019 to be effective for the 2019 plan year. This deadline would apply to any current profit sharing (only) plan that adds a 401(k) and safe harbor feature, as well as to any newly implemented 401(k) plan that will provide for a 2019 safe harbor provision.
Safe Harbor 401(k) Plan Design Amendments – December 1, 2019
The rules applicable to ADP and/or ACP safe harbor plans effectively restrict the ability to amend certain provisions once the plan year begins. Since December 1st (30-days prior to plan year beginning) is deemed to be an acceptable time frame for delivery of the 2020 Safe Harbor Notice on which plan provisions are detailed, all desired changes for the 2020 plan year should be adopted prior to this date.