What Are the Safe Harbor 401(k) Plan Rules for 2021?

Safe Harbor 401(k) plans have been available since 1996 as an easy way for employers to automatically pass the ADP and ACP nondiscrimination tests. To demonstrate that their plans do not excessively favor Highly Compensated Employees (HCEs), employers must provide matching or nonelective contributions to all employees. By tying what Highly Compensated Employees contribute to what Non-Highly Compensated Employees (NHCEs) contribute, there is an incentive for companies to educate employees on plans and encourage them to increase their savings. The general spread is two percentage points, so if the NHCE average is 3.5%, the HCE average cannot exceed 5.5%.

The SECURE Act went into effect for the 2020 plan year, with the following changes in place for 2021:

• The max automatic contribution rate for a QACA Safe Harbor 401(k) increases from 10 to 15%.

QACA Safe Harbor plans previously involved automatic enrollment at a rate of 3% or higher, increasing contributions in 1% increments to a 6-10% maximum. This new cap is not a required change, however. Plans may opt to increase or keep their plans the same. The IRS recommends that sponsors who wish to increase the rate cap review their plan documents and adopt an amendment to their 401(k) plans no later than the end of 2022.

• Notice requirements are no longer mandatory for QACAs non-elective or Safe Harbor non-elective contribution plans.

Prior to the SECURE Act, employers had to send out a Safe Harbor plan notice to participants prior to the beginning of the plan year or prior to an employee becoming eligible to participate. The eliminated notice requirement only applies to nonelective Safe Harbors that satisfy the ADP test, however. Plans that provide matching contributions to satisfy the ACP test must still provide the Safe Harbor notice. Other notices (for instance, the eligible automatic contribution arrangements, auto-enrollment opt-outs, and mid-year contribution elimination) are still required.

• Employers can retroactively adopt a Safe Harbor if they use nonelective contributions.

The SECURE Act allows employers to retroactively apply a 3% nonelective Safe Harbor contribution to the year as long as it is adopted before December 1, 2021. If an employer is willing to offer a 4% nonelective contribution, the final deadline to make 2021 contributions becomes December 31, 2022. The IRS has clarified that sponsors can retroactively add non-elective contributions to satisfy the ADP Test or to make an auto-enrollment plan a QACA non-elective plan, but this approach would not satisfy the ACP Test unless the sponsor had satisfied the annual notice requirement.

Ubiquity is a trusted administrative partner for all types of small business 401(k) retirement plans. Contact us to explore starting a Safe Harbor 401k for your business or switching to a Safe Harbor from your existing plan.