Safe Harbor 401(k) Plans--Oct 1st Deadline
It is time for Safe Harbor 401(k) plan design considerations. Some plan design features to note are: the plan must be designed so that the required Safe Harbor notice with the plan provisions can be provided 30 days prior to the plan start date and employee education meetings can occur. And, plan sponsors may be entitled to a tax credit of up to $500 for administrative fees for the first 3 years of the plan.
Now is the time to start determining your interest in establishing a Safe Harbor 401(k) plan. This posting highlights some of the major benefits and features of Safe Harbor 401(k) plans and provides important dates/timing issues. There are many factors to consider before establishing a Safe Harbor plan.
Under a Safe Harbor plan, an employer using the basic matching contribution alternative makes a contribution that matches 100% of the first 3% of each participating employee’s pre-tax deferral, plus an additional 50% matching contribution for pre-tax deferrals that exceed 3% but do not exceed 5% of the employee’s compensation. Each year an employer must make either the basic matching contribution or a nonelective contribution. The plan document will specify which contributions will be made and this information must be provided to employees before the beginning of each year.
Establishing a Start Up Safe Harbor Plan
- Safe Harbor plans do not require annual ADP/ACP testing. Beginning in 1999, as a result of law changes under the Small business Job Protection Act of 1996, employers could use an IRS design-based Safe Harbor method of satisfying the ADP and ACP tests.
- October 1: The first plan year must be at least three months long. This means that not only must the plan be effective and the adoption agreement signed, but the eligible employees must be able to actually commence deferrals by October 1 for a calendar-year plan. This three-month requirement is not applicable for a newly established business as long as they establish the plan as soon as possible after the business comes into existence.
Amending an Existing 401(k) Plan Before Beginning of the Next Plan Year
- Safe harbor 401(k) plans offer significant benefits to employers who have failed to maximize their retirement savings because of the low deferral rates of their non-highly compensated employees (NHCEs).
- Timing issues: An employer may amend an existing 401(k) plan to satisfy Safe Harbor requirements if the employer meets specific notice requirements, adopts Safe Harbor provisions in the adoption agreement before the beginning of the plan year that the safe harbor contribution is to be in effect, and provides either the three percent nonelective contribution or one of the Safe Harbor matching contributions, as elected in the adoption agreement and stated in the notice.
Contact Us
Baden Retirement Plan Services is experienced in Safe Harbor 401(k) plans and is available to assist you with your questions.