Plan Sponsor Series 5: Safe Harbor 401(k) Plans - Answers to the Most Common Questions

Originally posted by Lance Reising on August 15, 2017

One of the most under considered aspects of 401(k) plans, especially smaller ones, is overall plan design. This can happen when a small plan chooses a very large 401(k) provider who provides more standardized plan designs due to their sheer size. These plans may work satisfactorily but it is possible that rethinking and customizing a smaller plan's design might better suit both the principals and the employees in the sponsoring company.

One of the most popular 401(k) designs is a safe harbor 401(k) plan design. In a recent article, Eric Droblyen of Employee Fiduciary, a recordkeeping/administration firm, provides answers to FAQ's and a great description of Safe Harbor plans, including pros and cons. You can find the full article here.

Some question and answer excerpts from his article:

1. Why are safe harbor plans so popular? Adoption allows for automatic passing of ADP/ACP and top heavy testing which allows business owners to maximize their contributions without a risk of refunds.
   
2. What is required of the plan? The employer must satisfy certain levels of contributions, vesting, and notice requirements.
   
3. Is safe harbor a good option for every plan? No, every plan is different with different employee compositions. Because they have fairly stringent minimum requirements, they can turn out to be more expensive for the employer than a traditional 401(k) plan.
   
4. What are the employer contribution requirements for a safe harbor 401(k) plan? An employer must make either a safe harbor matching contribution or a nonelective contribution of 3% or more of deferred compensation. The matching contribution has two options: 1) A basic match of 100% of the first 3% of deferred compensation plus a 50% match on deferrals between 3% and 5% (4% total), or 2) an enhanced match, commonly 100% on the first 4% of deferred compensation.
   
5. What is a Qualified Automatic Contribution Arrangement (QACA)? It is a safe harbor 401(k) plan that automatically enrolls any eligible employee who fails to make their own enrollment election.These plans have their own special rules which apply.
   
6. Can a discretionary profit sharing contribution be made to a safe harbor 401(k) plan? If yes, is it subject to testing? Yes, but it must satisfy 401(a)(4) testing, and is dependent on the type of profit sharing allocation being used.
   
7. Can a discretionary matching contribution be made to a safe harbor 401(k) plan? If yes, is it subject to testing?Yes, and the matching contribution can be exempt from the ACP test if two conditions are satisfied.
   
8. Are safe harbor 401(k) plans always exempt from top heavy testing? NO. If one of several conditions apply, then testing may be required. Failure of a top heavy test can then require a minimum contribution.

Lots of things to consider. As Mr. Droblyen says:

"Know your options! Safe harbor 401(k) plans can be a great choice for small businesses that have trouble passing 401(k) testing. However, they are not for everybody - they can be more expensive than traditional 401(k) plans. Small business owners should weigh the pros and cons of these plans before choosing one for their company."

Every company is different. The best way to explore your options is to work with an expert in the field to determine what is best for you.

Questions about your own plan design? Contact us here!