Safe Harbor 401k Plans

							                              A Synopsis of Safe Harbor 401(k) Plans

Overview

401(k) plans are normally subject to certain nondiscrimination testing requirements.

The test that determines nondiscrimination testing for 401(k) contributions is known as the ADP
test.

The ADP test is oftentimes failed when Highly Compensated Employees (HCE’s) want to defer
a significant amount.

HCE’s cannot make 401(k) salary deferrals at a rate that is determined to be discriminatory by
the IRS compared to the rate of deferrals by Non-Highly Compensated Employees (NHCE’s).

The consequence of failing the ADP test is that some or all of the HCE’s will receive a portion of
their 401(k) salary deferrals back as a corrective distribution.

This means that HCE’s can be prevented from enjoying the full benefit of the company’s
retirement plan by a lack of participation from NHCE’s.

The IRS has provided an alternative means of satisfying the ADP test, this is known as a “safe
harbor”.

Under the safe harbor provisions, the requirements of the ADP test are considered to be satisfied
even though normal testing results may result in a failure.

Generally speaking, when owners and HCE’s desire to “max out” their 401(k) salary deferrals,
they will need to implement the safe harbor provisions.


Basic Requirements

If an employer wants their plan to enjoy the benefit of the safe harbor provision, their plan must
satisfy 4 requirements.


1 – Contribution Requirements

Plan utilizing the safe harbor provisions must make an employer contribution for that particular
plan year with the following guidelines:

           Contributions must be required by the plan
           Contributions must satisfy one of the basic formulas below

       2735 Crawfis Blvd., Suite 200   Fairlawn, OH   44333   P: 330.869.3747   F: 330.869.5050
           Contributions must be made to all eligible NHCE’s
           Contributions do not have to be made to eligible HCE’s
           Contributions may not have allocation requirements (e.g. 1,000 hours, last day)
           Contributions must be made no later that 12 months after the close of the plan year
              o If the employer wants to deduct these contributions, then the contribution
                  must be made no later than the due date (including extensions) of the
                  employer’s tax return.

Formula 1 – Matching Contribution

100% match on the first 3% of compensation deferred, plus
50% match on the next 2% of compensation deferred

                  Eligible Participant Deferral        Matching Contribution
                               0%                               0%
                               1%                               1%
                               2%                               2%
                               3%                               3%
                               4%                              3.5%
                               5%                               4%


Formula 2 – Nonelective Contribution

3% of employee’s compensation

                Eligible Participant Deferral          Nonelective Contribution
                             0%                                   3%
                            1+%                                   3%


2 – Vesting Requirements

All safe harbor contributions must be 100% vested at all times, regardless of the employee’s
length of service.


3 – Withdrawals

Hardship withdrawals are not permitted with respect to safe harbor employer contributions.




       2735 Crawfis Blvd., Suite 200   Fairlawn, OH   44333   P: 330.869.3747   F: 330.869.5050
4 – Annual Notice

All safe harbor plans must provide all eligible employees a written notice with the following
conditions:
            It must be provided on an annual basis
            It must be provided no later than 30 days before the beginning of the plan year
            It must satisfy certain content requirements


New Plans

A new 401(k) plan may be established and utilize the safe harbor provisions under the following
conditions:
            The safe harbor notice is distributed by the first day of the plan year
            The plan year is at least 3 months long


Conversion Plans

An existing 401(k) plan can implement the safe harbor provisions under the following
conditions:
            The plan is amended to include the safe harbor provisions
            The safe harbor notice is distributed at least 30 days prior to the following plan year

Note: An existing 401(k) plan cannot convert to a safe harbor 401(k) for the current plan year.

However, a non-401(k) plan (e.g. PS only plan) can add a 401(k) feature with the safe harbor
provisions for the current plan year.




        2735 Crawfis Blvd., Suite 200   Fairlawn, OH   44333   P: 330.869.3747   F: 330.869.5050