Safe Harbor 401(k)

As an employer, are you interested in a 401(k) plan that lets you avoid nondiscrimination testing by providing a minimum level of employer contributions? A safe Harbor 401(k) does just that. Safe Harbor 401(k) plans eliminate annual ADP and ACP tests that prevent highly Compensated Employees from contributing too much more than lower paid ones. So, you and your highly compensated employees can take full advantage of the $14,000 salary deferral limit, no matter what your other employees choose to do. And you'll never have to worry about taxable refunds at the end of the year.

Safe Harbor 401(k) plans were authorized by the Small Business Job Protection Act of 1996 for plan years starting in 1999. Any Company can establish a Safe Harbor 401(k) plan regardless of company size or whether or not the company has any other type of Plan.

• Matching: The employer provides a dollar-for-dollar match on the first 3% of pay an employee defers, plus .50-for-dollar on the next 2% of pay deferred (an employee deferring the maximum 5% of pay receives a maximum 4% matching contribution)
• Nonelective: The employer contributes 3% of pay for all eligible employees whether they contribute themselves or not.

Before each plan year ends you must give your employees a notice indicating your choice. You have the flexibility to switch between options from year to year as long as the employee notice is given as required and the plan document is amended. With the nonelective option, you have the flexibility to state that you are considering, though not committing to, making this type of company contribution and that you will notify them if you decide to do so.

The Safe Harbor 401(k) rules give employers up to 12 months after the plan year ends to make required employer contributions. However, to qualify for a tax deduction, contributions must be made by the due date of the company's tax return including extensions.

You can always amend your plan before the plan year begins to eliminate Safe Harbor 401(k) plan required contributions for the coming year. You can stop the future contributions during the year IF you chose the Matching option once you notify your employees as required but you must match any amounts they have already contributed. In this case, your plan would no longer have Safe Harbor status and will need to satisfy ADP and ACP testing. you can not stop required contributions during the year if you chose the non-elective option.

Safe Harbor 401(k) contributions are immediately 100% vested. You are free to make extra contributions up to the legal limits. Unlike required Safe Harbor 401(k) plan employer contributions, these extra contributions may be subject to a vesting schedule.

As a business owner, since Safe Harbor 401(k) plans are exempt from nondiscrimination testing, you can set aside up to 14,000 from your salary each year regardless of your employees' participation. In addition, you'll receive the company's required contributions, as well as your share of any extra contributions the company chooses to make. Your total contributions may be up to $42,000 (or 100% of pay if less).

Safe Harbor and traditional 401(k) eligibility requirements are the same: employees who are age 21 or older and who have at least 1 year of service (1,000 hours) must be allowed to participate. Union employees may be excluded. You may set less restrictive eligibility as desired. You must make Safe Harbor 401(k) required contributions for all employees who are eligible to participate in the plan during the year, regardless of the number of hours worked or whether they are employed on the last day of the plan year.

You must give your employees notice describing the plan and what the employer will contribute at least 30 days before and no more than 90 days before the new plan year. A newly eligible employee can receive the notice up to 90 days before, but no later than, the date they become eligible to participate. You must send additional notices to employees if you want to stop the matching contribution during the year or if you stated in the initial notice that you were considering making a nonelective contribution which you subsequently decide to make.

All 401(k) plans are subject to top-heavy rules, which require a 3% employer contribution if more than 60% of a plan's assets are in the accounts of key employees. However, if you chose the nonelective Safe Harbor 401(k) Option you can use that same 3% contribution to satisfy the top-heavy rules so no further contributions are required. The Matching Safe Harbor option also satisfies the Top Heavy rules eliminating the need for additional contributions.

A Safe Harbor 401(k) can be a valuable employee benefit that can help you be competitive in attracting and retaining talented Highly Compensated employees.