Ubiquity

What are the Safe Harbor 401k Plan Rules?

Ubiquity Retirement + Savings has been an affordable provider of retirement solutions, including Safe Harbor 401k plans, designed for small businesses, start-ups, and solopreneurs since 1999.

  • Streamlined, flat-fee plans starting at $75/month
  • Easy online set-up and management
  • Flexible investment options
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One of the main reasons employers choose Safe Harbor 401k plans for small businesses is to avoid the potentially costly and troublesome nondiscrimination testing rules. However, the Safe Harbor provision comes with rules of its own regarding deadlines for setup, altering the match, and giving employee notice.

Safe Harbors also have special rules regarding vesting, eligibility, duration, and allocation. These rules are subject to change from the IRS any given year, so it’s important to work with a plan administrator who keeps you in the loop about compliance.

What is the main requirement for a Safe Harbor 401k?

The most important requirement of a Safe Harbor 401k is that:

  • The employer MUST make contributions that vest immediately to their employees’ accounts.
  • Employers may choose between basic or enhanced matching formulas or make a standard nonelective contribution to all eligible employee plans, regardless of employee participation.
  • The plan must allow 100% vesting of the Safe Harbor contributions (not including QACA).

Mandatory, vested contributions to employee plans is the most notable Safe Harbor requirement, but there are additional rules governing when and how you offer your plan.

Additional Safe Harbor Vesting Rules

While your basic/enhanced match or nonelective contribution must be nonforfeitable and 100% vested immediately to the employee, you can vest the “additional” contributions, if you are making them. For instance, Qualified Automatic Contribution Arrangement (QACA) or matching contributions to satisfy ACP tests may be set to a vesting schedule (up to a two-year cliff).

Safe Harbor 401k Eligibility Rules

All employees that are eligible to contribute to your 401k plan are also eligible for the Safe Harbor match or nonelective contribution. Plan sponsors MUST offer the Safe Harbor 401k to all employees who:

  • Are 21 years of age and older
  • Have worked at least one year (with at least 1,000 hours of service)

A plan can allow more lenient eligibility requirements if the employer wishes to do so, but once an employee is eligible, they will receive the contribution due to them for the year. Employers cannot impose additional “last day of service” restrictions or hours requirements.

Safe Harbor Withdrawal Rules

Distributions of elective deferrals, qualified matching, and qualified nonmatching contributions from Safe Harbor 401k plans cannot be withdrawn prior to termination of employment or age 59.5. However, a new exception was granted as of January 1, 2020, allowing hardship withdrawals from Safe Harbor plans on account of immediate and heavy financial need.

The 12-Month Plan Rule

Safe Harbor 401ks are to be adopted before the first day of the plan year and remain in effect for an entire 12-month plan year. Minor amendments are allowed mid-year, as long as sufficient notice is given. For instance, you may change the investment fund provider, add an age 59.5 withdrawal feature, or increase the matching contribution percentage.

Explicitly prohibited mid-year amendments include:

  • An increased number of service years to achieve QACA vesting.
  • A reduction in the number of existing employees eligible for Safe Harbor contributions.
  • A modified matching contribution formula – unless certain criteria is met.

In 2020, exceptions can be made for businesses operating at a loss. The matching contribution formula can be suspended or modified as long as the change is announced at least three months before January 1, 2021.

Safe Harbor Deadlines for New Plans

  • September 25, 2020: Contact Ubiquity by this date to set up a new Safe Harbor 401k Plan for the existing year.
  • October 1, 2020: IRS deadline for setting up your new Safe Harbor 401k and being exempt from nondiscrimination testing for 2019.

Safe Harbor Deadlines for Existing Plans

  • November 30, 2020: Contact Ubiquity by this date to request Safe Harbor for 2021.
  • December 2, 2020: Send 30-day notice to employees to explain the new Safe Harbor provision.
  • January 1, 2021: Safe Harbor matching takes effect. You’re exempt from nondiscrimination testing.

Employee Notice Requirements for New or Amended Safe Harbors

The Safe Harbor notice can be delivered electronically, by hand, or by mail, but must contain the following:

  • The Safe Harbor nonelective matching formula used in the plan
  • The level of matching contributions, if any, under the plan
  • The conditions that may affect the employer match
  • The method of making deferrals under the plan
  • The periods available for making elections
  • The applicable withdrawal and vesting provisions
  • How to obtain additional information about the plan

Employers are responsible for timing and tracking the delivery of this notice, which can come up in auditing by the IRS or DOL. Notices must be delivered 90 days before the beginning of the first Safe Harbor plan year (October 1) or within 30 days of an existing plan amendment (December 2).

Companies like Ubiquity automatically send notice on behalf of small business owners, so there is one less task to think about. Contact us to discuss the Safe Harbor 401k today!

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© 2020 Ubiquity Retirement + Savings
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44 Montgomery Street, Suite 3060
San Francisco, CA 94104
Support: 855.401.4357

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© 2020 Ubiquity Retirement + Savings
Privacy Policy
44 Montgomery Street, Suite 3060
San Francisco, CA 94104
Support: 855.401.4357

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