Safe Harbor 401k Plans
401k compliance tests are designed to ensure 401k plans have a
threshold balance, at minimum, of participation of rank-and-file
employees in relation to highly-paid employees.
The IRS offers an alternative means of achieving 401k plan balance:
The safe harbor method of plan operation lets 401k plans skip their
annual 401k discrimination testing so long as the sponsoring employer
meets certain employer 401k contribution requirements designed to ensure
broad participation in the company plan and provides 100% immediate
vesting of the contributions.
- To qualify a 401k plan as a safe harbor plan, an employer must make
matching contributions that fulfill the below requirements or make
nonelective contributions equal to 3% of each eligible employee's
- Nonelective contributions are made to all eligible employees,
regardless of if the employees participate in the company 401k plan.
Matching contributions, on the other hand, being based upon salary
deferral amounts, are made only to active 401k participants' accounts.
- If the employer chooses to make safe harbor matching
contributions, those contributions must meet two requirements: First,
each non-highly-compensated employee must receive a dollar-for-dollar
match on salary deferrals up to 3% of compensation and a 50¢ to the
dollar match on salary deferrals from 3% to 5% of compensation. Second,
the rate of any matching contributions being made to highly compensated
employees cannot exceed that being made to non-highly compensated
- Employers can decide as late as 30 days before the end of each
plan year whether or not to take the safe harbor route. However, if, as
its safe harbor contribution, the employer wants to make matching
contributions rather than the flat 3% of compensation contribution, the
employer must define the matching formula well ahead of those 30 days;
in fact, any safe harbor matching contribution must be defined and
communicated to employees no later than 30 days before the START of the
applicable plan year so employees have plenty of time to adjust their
contribution rates accordingly.
The employer must provide annual information to employees explaining
the 401k plan's safe harbor provisions and benefits, including that safe
harbor contributions can not be distributed before termination of
employment and that they are not eligible for financial hardship
Your Small Business 401k system includes such notification within
your customized 401k plan's Summary Plan Description, a document that's
updated at least annually for all eligible employees.
- If you don't choose the safe harbor method of 401k plan
administration, we encourage you to use your customized 401k plan
administration system's point-and-click compliance testing every month
to keep well apprised of your plan's health.
Whether you choose to run your 401k plan via the safe harbor method
or 401k discrimination testing, 401k plan administration is easy with
Small Business 401k!
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