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Since its introduction in 1999, the safe harbor 401(k) plan has become more and more popular with employers as a way to avoid ADP testing while increasing employee appreciation by providing a guaranteed employer contribution.  Although several of our clients are already taking advantage of this noteworthy plan design, we would like to take this opportunity to answer some frequently asked questions regarding safe harbor plans.

Q1:      What is a safe harbor plan?

A1:      A safe harbor plan is one in which the employer avoids ADP testing by meeting four conditions:  1) a safe harbor contribution requirement; 2) a vesting requirement; 3) withdrawal restrictions and 4) an annual notice requirement.  If a safe harbor 401(k) plan includes a matching contribution, the match may or may not be subject to the ACP test depending on the match formula.

Q2:      What is the safe harbor contribution requirement?

A2:      An employer will be deemed to satisfy the ADP test if a 3% nonelective contribution is made for all eligible participants, or a basic match of 100% on the first 3% deferred plus 50% on the 4th and 5th percent deferred is made for all contributing participants.  An “enhanced” match may be provided as long as it satisfies certain restrictions. 

Q3:      What is the vesting requirement?

A3:      Safe harbor contributions must be 100% vested immediately.

Q4:      What are the withdrawal restrictions?

A4:      Regardless of whether the safe harbor contribution is provided as a nonelective contribution or as a match, the contribution is subject to the same withdrawal restrictions as elective deferrals.  That is, safe harbor contributions may not be withdrawn before the earlier to occur of termination of employment, death, disability, or retirement.  Additionally, safe harbor contributions may not be withdrawn for hardship reasons, even if the plan otherwise allows hardship withdrawals.

Q5:      What is the annual notice requirement?

A5:      The employer must provide a written notice of the safe harbor contribution to all eligible employees not less than 30 days nor more than 90 days prior to the beginning of each safe harbor plan year.  If a newly eligible participant becomes eligible for the plan later than the 90th day before the beginning of the plan year, the timing requirement is satisfied if the notice is given no later than his or her date of eligibility, but not more than 90 days prior to that date.

The notice must also satisfy a content requirement by describing the following:  the safe harbor contribution formula; any other contributions under the plan (including the potential for discretionary contributions); the type and amount of compensation that may be deferred under the plan; how to make deferral elections (including administrative requirements applying to such elections); the periods available for making deferral elections; and withdrawal and vesting provisions applicable to contributions under the plan.  The notice may not cross-reference the SPD with regard to some of the required information.

Even if all other safe harbor conditions are met, the plan will not be deemed to satisfy the ADP test unless this notice is provided.

Q6:      Are there any other requirements?

A6:      Yes.  The safe harbor contributions must be required under the terms of the plan document; they may not be discretionary with the employer.  The plan document must also specify that the plan is using the safe harbor alternative to the ADP (and, if applicable, ACP) test.  If the employer is using a safe harbor match, the document must also specify whether the match will be determined per-payroll or annually.  (An employer may operate its plan in accordance with the safe harbor rules as long as conforming amendments are adopted by the end of the GUST II remedial amendment period and are retroactively effective as of the first day of the applicable plan year.)  Additionally, the employer may not impose allocation conditions, such as a last day or 1000 hour requirement, on the safe harbor contribution.

Q7:      What is an “enhanced” matching formula?

A7:      An enhanced matching formula must be no less than the basic match at each level of deferral; cannot increase as the rate of deferral increases; and cannot provide a higher level of match to Highly Compensated Employees (HCEs) than to Non-Highly Compensated Employees (NHCEs), even if such match is shown to be otherwise nondiscriminatory under §1.401(a)(4).  An example of an enhanced match could be a match of 100% on the first 4% deferred, or a match of 150% on the first 3% deferred.  A match of 50% on the first 10% deferred would not be considered an enhanced match because, although it provides for an overall 5% match (the basic match provides for an overall 4% match), a participant deferring 5%, for example, would receive a match of only 2.5%, rather than the 4% he or she would receive under the basic match.

Q8:      Can the employer make other contributions to the plan?

A8:      Yes.  The employer may provide for additional discretionary nonelective or matching contributions.  These contributions are not subject to the immediate vesting requirement and may not be subject to other allocation conditions.  Also, beginning in 2002, catch-up contributions may be made by participants who are age 50 or older without affecting the safe harbor status of a plan.

Q9:      Can an employer also be deemed to satisfy the ACP test under a safe harbor plan?

A9:      Yes, if certain restrictions are met.  An employer who uses the 3% nonelective contribution to satisfy the ADP test, or who uses an enhanced match and/or provides for an additional match must also meet certain match requirements to be deemed to satisfy the ACP test.   An employer cannot be deemed to satisfy the ACP test without first meeting an ADP safe harbor, although it is allowable to use an ADP safe harbor and still perform the ACP test.

Q10:    How is a match deemed to satisfy the ACP safe harbor?

A10:    An employer who satisfies the ADP test under the basic match formula and provides no other match is also deemed to satisfy the ACP test.  A discretionary match, which cannot be used to satisfy the ADP safe harbor, may not exceed 4% of compensation.  The discretionary match may consider deferrals in excess of 4% as long as the total match does not exceed 4% (e.g., a 50% match on the first 8% deferred would meet this requirement).  A fixed match (the amount is specified in the plan document) may not consider deferrals over 6%.  The fixed match itself is not limited to 6%, but the amount of deferrals matched cannot exceed 6% (e.g., a 150% match on the first 6% deferred would meet this requirement).  These matching contributions do not have to be 100% vested to meet the ACP safe harbor as long as the ADP safe harbor is met otherwise.

Q11:    Once a plan becomes safe harbor must it always remain safe harbor?

A11:    No.  A plan providing a safe harbor match may choose to reduce or discontinue the match during the plan year (or for any subsequent plan year) and run the ADP/ACP test instead.  To reduce or discontinue the match, the employer must amend the plan.  Additionally, the employees must be supplied a notice of the reduction or discontinuance of match at least 30 days before it takes effect.  The ADP/ACP test will still apply even if a reduced match formula still satisfies the safe harbor requirements, because the match formula must be uniform for the entire plan year.  The plan would have to be amended again to reinstate the safe harbor match.

A plan that does not currently provide for the 3% nonelective safe harbor may take a wait-and-see stance by providing a “maybe” notice at least 30 days prior to the beginning of a plan year.  Then, at least 30 days prior to the end of that plan year, the employer can amend the plan to provide for the 3% nonelective safe harbor contribution and provide a supplemental notice to employees.  Once the 3% nonelective safe harbor contribution is in place for a plan year, it may not be discontinued for that year.  If the plan document provides for the 3% nonelective safe harbor contribution for a plan year, it may be amended in order to discontinue the contribution for a succeeding plan year, as long as the amendment is completed before the succeeding plan year begins.

Q12:    Can the employer limit eligibility for the safe harbor contribution?

A12:    Yes, the plan document may specify that the safe harbor contribution will be provided only to employees who have attained age 21 and completed 1 year of service, even if the eligibility requirements for 401(k) contributions are more liberal.   For any plan year in which there is an HCE in the group that does not meet the statutory eligibility requirements, the ADP/ACP test must be performed for that group.

Q13:    Can the safe harbor contributions be used for any other purpose?

A13:    Yes, the government has allowed “double-” and even “triple-dipping” with regard to the safe harbor contributions.  This means the 3% nonelective contribution may be used to satisfy the minimum contribution requirement in a top heavy plan, as well as be counted in the nondiscrimination testing for a new comparability (cross-tested) plan.  The contribution cannot, however, be used towards any permitted disparity formula or when imputing permitted disparity in a cross-tested plan.

For plan years beginning on or after January 1, 2002, matching contributions, including a safe harbor match, may also be used to satisfy part or all of the minimum contribution requirement in a top heavy plan.  Additionally, for plan years beginning on or after January 1, 2002, a safe harbor 401(k) plan is deemed to be a “non top heavy” plan if certain conditions are satisfied.  The plan must consist solely of a safe harbor 401(k) arrangement, and, if there are matching contributions, all of the match must satisfy the ACP safe harbor.  The only nonelective contribution allowed for this purpose is the 3% safe harbor contribution.   (If the plan document allows for a discretionary nonelective contribution but the employer does not make these contributions or reallocate forfeitures, the top-heavy exemption applies.)   If the employer disaggregates the plan as in Q12 above, this rule will not apply because the plan would not consist solely of a safe harbor 401(k) arrangement.


As you can see, there are numerous advantages to a safe harbor plan, although there can be some pitfalls for the unwary.  If you are considering adopting a safe harbor plan or making changes to your existing plan, please contact your consultant to discuss how these changes may affect your plan administration.  As always, we are here to assist you.

The general information provided in this guide is based upon complex requirements of the Internal Revenue Code and Treasury Regulations. It is provided with the understanding that, for the purposes of this publication, MBC Retirement Services, Inc. is not engaged in rendering legal, accounting, or other professional services. Although care has been taken to present the material accurately, MBC Retirement Services, Inc. disclaims any implied or actual warranties as to the accuracy of any material herein and any liability with respect thereto.