Safe harbor 401(k) plans are the most popular type of 401(k) plan sponsored by small businesses today. They can automatically pass annual nondiscrimination testing by allocating a safe harbor contribution to participants. This trade-off is often a win-win for small business owners and their employees.
We get a lot of questions from small business owners about safe harbor 401(k) plans. Below is a FAQ with answers to the most common questions we receive. These answers reflect changes made by the Setting Every Community Up for Retirement Enhancement (SECURE) Act 1.0 and 2.0. A general outline of safe harbor 401(k) plans can be found here.
Yes. Non-elective contributions, also known as profit-sharing, made to a safe harbor 401(k) plan are treated the same as if made to a conventional 401(k) plan. Therefore, you are able to apply allocation conditions to the non-elective contributions and the non-elective contributions must satisfy the 401(a)(4) nondiscrimination test. Non-elective contributions in addition to safe harbor contributions may also be subject to vesting.
To illustrate, your 401(k) plan uses the safe harbor non-elective contribution option and you also want to provide an additional non-elective contribution. The first 3% of employee’s compensation contributed to the plan as a non-elective contribution will be used to satisfy the safe harbor requirement. Any additional compensation contributed as a non-elective contribution may be subject to allocation conditions, such as being employed on the last day of the plan year, and may be subject to vesting, such as a 3-year cliff schedule.
Yes, match in addition to either match or non-elective safe harbor contributions can be contributed to the plan. The additional match can be either a fixed formula or discretionary. You may apply allocation conditions to the additional match or have it be subject to vesting. Certain annual testing, including the ACP test, must be satisfied for the additional match.
However, the additional match may be exempt from ACP testing if it meets the following conditions:
To illustrate, your 401(k) plan uses the safe harbor non-elective contribution and provides for a discretionary match. Your business had a good financial year in 2023 and you would like to give back to employees who were contributing to the plan. You decide to provide a match of 100% of elective deferrals up to 4% of deferred compensation. Any employee making elective deferrals in 2023 is eligible for this match. Your safe harbor 401(k) plan would be exempt from ACP testing for the 2023 plan year.
On the other hand, if the match was 50% of elective deferrals up to 8% of deferred compensation, your safe harbor 401(k) plan would be subject to ACP testing for the 2023 plan year. Even though the maximum match is the same – equal to 4% of compensation – the match cannot be based on more than 6% of deferred compensation. This additional match may still be contributed without impacting the plan’s safe harbor status, but the additional match will be subject to ACP testing.
One final note, match in addition to safe harbor contributions may be subject to vesting.
No. One of the benefits of being a safe harbor 401(k) plan is that you are generally exempt from top-heavy testing. However, if you select certain plan design features, your plan may not be exempt. In other words, you, as the employer, control whether your safe harbor 401(k) plan is always exempt from top-heavy testing. The following plan design features result in your safe harbor 401(k) plan being subject to top-heavy testing:
If your plan is subject to top-heavy testing and it is determined to be top-heavy, all employer contributions made during the plan year, including safe harbor contributions, will count towards satisfying the top-heavy minimum contribution.
To illustrate, your 401(k) plan uses the safe harbor match contribution and allows for a non-elective contribution. In 2023, you decide to provide a non-elective contribution to any eligible employee who met the allocation conditions (i.e., worked more than 1,000 hours and was employed on the last day of the year). Due to the non-elective contribution in 2023, your safe harbor 401(k) plan is subject to top-heavy testing. If it is determined that your plan was top-heavy for 2023, then the safe harbor match contributions along with the non-elective contributions both count in satisfying the top-heavy minimum contribution requirement.
Maybe. A safe harbor non-elective 401(k) plan is generally exempt from the participant notice requirement. A notice is still required if:
Yes. You can reduce or suspend either match or non-elective safe harbor contributions mid-year when all of the following conditions are met:
To illustrate, your safe harbor non-elective 401(k) plan timely sent the notice to employees in November 2022, for the 2023 calendar plan year. The notice included a statement that the business may decide to reduce or suspend contributions during the year. In April 2023, you decide it’s too much to worry about the safe harbor contribution at the end of the year. The supplemental notice is sent to employees on April 14, 2023. The supplement notice explains how the non-elective safe harbor contribution is suspended effective May 14, 2023, and how employees can change their elective deferrals. The plan amendment to apply the ADP test must be signed before May 14th for that to be the effective date. If all these actions occur, then:
There are reduced administrative steps if the reduction or suspension is part of a plan termination in connection with:
For terminating plans meeting one of these conditions, there is no supplement notice requirement, and the plan is still exempt from the ADP test and the top-heavy test. The only requirement is for the plan to meet the safe harbor requirements for compensation paid through the effective date of the termination.
To illustrate, your safe harbor non-elective 401(k) plan timely sent the notice to employees in November 2022, for the 2023 calendar plan year. In April 2023, you are in negotiations to be purchased by another company closing on May 1, 2023. No supplemental notice, ADP testing or top-heavy testing is required. You are only responsible for paying the 3% non-elective safe harbor contribution for compensation paid from January 1, 2023, through May 1, 2023.
Generally, yes.
If the amendment affects the content of the previously provided safe harbor notice, a new notice must be sent within a reasonable time before the amendment’s effective date. 30 to 90 days before the effective date is deemed reasonable. If the notice cannot be provided before the effective date, then it must be provided no later than 30 days after the amendment is signed. In addition, employees must be given a reasonable opportunity to change their deferral election before the amendment’s effective date. A 30-day election period is deemed reasonable.
The following are prohibited mid-year changes:
Safe harbor 401(k) plans can be a great choice for small businesses that have trouble with annual testing. However, they are not for everybody – they can be more expensive than conventional 401(k) plans due to the mandatory contributions. You should weigh their pros and cons vs. a conventional plan before choosing one for your business.