Safe harbor 401(k) plans for you & your team.

A safe harbor plan is a qualified plan that uses a pre-determined employer contribution that is provided to all participants of the plan in exchange for an automatic pass on some annual nondiscrimination tests.

There are three types of safe harbor contributions:

• Basic match Company matches 100% on the first 3% of deferred compensation, plus a 50% match on the next 2% of deferred compensation. For example, if an employee earns $60,000 and defers 4% of her compensation ($2,400), the employer will match $1,800 ($60,000 x 3%) x 100%. Then the employer will match 50% of the remaining 1%, which is $300 ($60,000 x 1% x 50%). The total match from the employer then is $2,100 ($1800 + $300).

• Enhanced match: Company match that’s at least as generous as the basic match at each tier of the match formula. A common formula is a 100% match on the first 4% of deferred compensation. The maximum enhanced match is 100% match on the first 6% of compensation. For example, if an employee makes $60,000 and defers 4% ($2,400) of her compensation, the employer will match the same amount ($2,400). 

• Nonelective: Company contributes 3% or more of each employee’s compensation, regardless of whether the employee also makes elective deferrals. . For example, if an employee makes $60,000, they will receive a nonelective contribution totaling $1,800 whether or not they choose to defer into the plan.

All safe harbor plan designs may include an automatic contribution arrangement (ACA), which treats an employee who fails to make an election as having elected to defer the default percentage set by the plan. The employee can opt out of the default at any time. A specific combination of safe harbor required contributions and ACA provisions make a plan a QACA plan. 

Unlike other safe harbor designs, QACA plans are permitted to use a two-year cliff vesting schedule for employer safe harbor contributions. Some employers are willing to jump through additional design hurdles to take advantage of this two-year vesting schedule.

Yes. A plan can still make additional contributions, such as a discretionary match subject to a vesting schedule, or a profit-sharing contribution also subject to a vesting schedule. However, these additional contributions may subject the plan to nondiscrimination testing which the employer is trying to avoid by adopting the safe harbor provisions. There are specific methods of contributing additional funds to a plan that can potentially avoid making refunds or requiring certain contributions - ask a compliance specialist for more information should an employer want to contribute more than a safe harbor contribution in a plan year.

The basic match, enhanced match, or nonelective contribution must be 100% vested. The QACA contributions (see question 3 above) are allowed to use a two-year cliff vesting schedule.

Yes, but safe harbor contributions are subject to the same restrictions as employee deferrals. Consult the specific plan document to see if the safe harbor contribution is available for an in-service distribution such as age 59 ½ or hardship, as these aren’t required to be offered by plans.

The safe harbor contributions allow the plan to automatically pass ADP testing (and ACP testing if a safe harbor match is made). If the plan's annual contributions consist solely of elective deferrals and safe harbor contributions, the plan is also deemed to meet top-heavy requirements for that year without additional contributions being made by the employer (if applicable).

The safe harbor contributions made into the plan are included in other annual tests, such as annual additions and top-heavy testing.

If the plan is a new plan, 

• The first plan year must provide a deferral opportunity of at least three months (for both match and nonelective type designs).

• Timing to add the safe harbor provision:

  • A safe harbor match can only be added on or before 10/1 of the plan year (or an effective date before the 1st pay date in October).  

  • A 3% safe harbor nonelective can be added before December 1 of the plan year and must be retroactive to the first day of the plan year. Keep in mind that in order to take advantage of this opportunity for the first plan year, the plan had to be set up by October 1, as discussed above, so that the 3 months of deferrals requirement is met.

If the plan already exists and the participants have had at least a three-month opportunity to defer to the plan,

• Safe harbor match must be added to the plan via amendment in time to distribute the notice by December 1 (30 days before the plan year begins) to add as of January 1 of the following year.

• Safe harbor nonelective can be added via plan amendment:

  • By December 1 of the prior plan year in time to distribute a notice to contribute the minimum amount of 3% of eligible wages

  • By December 31 of the following plan year to contribute a 4% contribution retroactively for the prior plan year

Yes. An annual notice is required to go out at least 30 days prior to the beginning of the plan year in order to notify employees that they will be eligible to receive the match or nonelective contribution. The notice will provide the contribution formula, how to make deferral elections, withdrawal, and vesting information.

In the case of a match, it's imperative that this notice go out 30 days prior because deferrals are not allowed to be retroactive. Although the notice is also required for 3% safe harbor nonelective contributions, you will find that there is more leeway because the 3% contribution (or 4% if making a decision after the plan year ends) does not depend on the employee deferring into the plan and therefore can be made retroactively. This is why there are differences between requirements when adding a safe harbor match vs nonelective to the plan.