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Safe Harbor 401k Rules and Requirements

The Safe Harbor 401k design feature is a popular solution for small business owners to maximize contributions to their own plans while saving time and administrative hassle.

Saving in a 401k is one of the best ways to help you and your employees achieve your retirement planning goals. A Safe Harbor 401k boosts your employee’s nest eggs with the addition of a mandatory employer contribution. In exchange for your generosity, the plan is not subject to annual testing – easing the administrative burden (and associated costs) and freeing owners to make larger contributions to themselves and/or their best employees.

Nondiscrimination testing can be a hurdle for small business owners running a 401k plan. This mandatory testing is in place to ensure that all employees, regardless of salary or status, are treated equally by the plan. Under testing rules, if “rank and file” employees aren’t putting enough into the plan, the amount owners can contribute for themselves and highly compensated employees (HCEs) will be limited. Safe Harbor 401k rules ensure your plan is fair and will pass the two primary compliance tests.

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Deep Dive into a Safe Harbor 401k with Ubiquity

Employer Contribution Rules and Requirements

Under a Safe Harbor 401k plan, the business owner makes a minimum contribution to the plan each year—which must be 100% vested (in other words: non-forfeitable). There are 3 main contribution options for employers to choose from:

  1. Basic Matching: Your company matches 100% of each employee’s 401(k) contributions, up to 3% of an their annual compensation, plus a 50% match of the next 2% of their defferals.
  2. Enhanced Matching: Your company matches at least 100% of each employee’s 401(k) contributions, up to 4% of their compensation.
  3. Non-elective Contribution: Your company contributes at least 3% of each employee’s compensation to all eligible participants—regardless of the employees’ contributions.

Once the Safe Harbor minimum contribution is satisfied, you can then defer the maximum $18,000 for yourself and more easily reward your most valuable staffers (and yourself) with profit-sharing plan contributions up to the individual maximum of $54,000.

Like a traditional 401(k) plan, a safe harbor 401(k) still allows you and your employees to make contributions from salary to save for retirement with pre-tax income. As of 2018, employees can contribute up to $18,000 a year (or $24,00 if they are 50 or older) from their salary. Those who contribute to a Safe Harbor 401(k) benefit from a lower tax bill and potentially far greater savings growth into the future.

Additional Safe Harbor Rules:

  • 100% vesting, immediatly. All Safe Harbor employer contributions are 100% vested to the employee– this means they are nonforfeitable. If you choose to make additional employer contributions (whether match or profit sharing), those contributions may be subject to a vesting schedule.
  • 12-month plan rule. Safe harbor plan rules should be adopted before the first day of the plan year and remain in effect for an entire 12-month plan year.
  • Eligibility. All employees that are eligible to contribute to your 401k plan are also eligible for the Safe Harbor provisions for the plan. This means that once an employee is able to contribute to their own plans, they are also eligible for employee matching.
  • No allocation restrictions.  Once an employee is eligible for the Safe Harbor contribution, they will receive the contribution due to them for the year.  The employer cannot impose additional restrictions such as a “last day of service” or an hours requirement for Safe Harbor contributions

Safe Harbor Notice Requirements

In addition to maintaining a Safe Harbor plan an entire plan year, employers must provide an annual notice to all eligible employees 30-90 days before the beginning of the plan year. This document outlines the employee’s rights and obligations under the Safe Harbor Plan provision.

Your Safe Harbor notice must contain the following:

  • The safe harbor matching or non-elective formula used in the plan
  • Level of matching contributions, if any, other contributions under the plan, and the conditions under which they will be made
  • The type and amount of compensation that may be deferred
  • The method of making deferrals under the plan
  • The periods available for making elections
  • The withdrawal and vesting provisions applicable to contributions under the plan
  • How to obtain additional information about the plan

Your Safe Harbor Plan Notice may be delivered electronically, by hand, or by regular mail. Employers are responsible for tracking the delivery list, method, and timing of delivery— which will be requested in case of an audit by IRS or DOL. With a Ubiquity Safe Harbor 401k we will administer the plan notice for you, eliminating administrative hassle.

401k Compliance Testing

A Safe Harbor plan is designed to pass the two nondiscrimination tests that the plan is not providing a more significant benefit to HCEs.

  •  The Actual Deferral Percentage (ADP) test: This limits the percentage of compensation that HCEs can defer into the 401k based on the average contribution rates of the non-highly paid employees.
  • The Actual Contribution Percentage (ACP) test: This ensures that the employer matching contributions and any after-tax employee contributions contributed for HCEs are not disproportionately higher as compared to non-highly paid employees. 

Top Heavy Testing

Top Heavy testing is similar to the ADP and ACP tests but is focused on plan balances. If you and your key employees cumulatively hold 60% or more of the total balance plan, then the plan is Top Heavy.

If the only contributions you make to your plan are Safe Harbor contributions and employee deferrals, your 401(k) plan is exempt from Top Heavy correction requirements. If your plan is Safe Harbor, but a Discretionary Profit Sharing or Matching were deposited’ the plan is NOT exempt from Top Heavy Testing.

Safe Harbor Provision Deadlines

New plans:

The Safe Harbor provisions must be in place for at least 3 months if you are adopting a new 401(k) or 403(b) plan.  So, if you are starting a new calendar year plan, the plan must begin no later than October 1 to include Safe Harbor provisions for that first plan year. Starting a new plan can take time to administer, so we recommend contacting your plan provider no later than September 21st.   Request a Free Consultation Today!

Existing Plans:

Safe Harbor provisions can only be added to an existing plan before the beginning of the plan year, and they must be in effect for the entire year.  Safe Harbor provisions cannot be changed or eliminated during the year except if the plan is terminated completely.  In the event of plan termination, the Safe Harbor contribution up through the date of termination would still apply.

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© 2018 Ubiquity Retirement + Savings / Privacy Policy
1160 Battery Street, Suite 350, San Francisco, CA 94111 / Support: 855.401.4357