Introducing Safe Harbor
There is a way to set up a 401(k) plan and avoid many of the annual compliance challenges. It’s called the Safe Harbor Plan. Such a plan automatically meets the non-discrimination rules described earlier. Therefore, the ADP and ACP tests do not apply, and HCEs’ contributions to the plan are not limited to what the rest of the workforce contributes.
A Safe Harbor plan is exempt from the maximum hardship test unless an employer makes a required Safe Harbor match or contribution described in the next section. For example, in the case of profit sharing contributions, it may be necessary to carry out a more stringent test. If the test indicates that the plan is top-heavy, the employer may be asked to make additional contributions to the plan.
To be relieved of many of the testing and other administrative burdens, employers who choose a Safe Harbor 401(k) must make annual contributions on behalf of their employees and follow other requirements based on their 401(k) design choices.
Safe Harbor 401(k) Design Choices
A Safe Harbor 401(k) can be structured in two ways – a traditional Safe Harbor 401(k) and a Qualified Automatic Contribution Arrangement (QACA). Both eliminate the need for testing and require the employer to contribute to the participants. However, some important differences are listed in the table.
Traditional Safe Harbor 401(k) Qualified Automatic Contribution Arrangement (QACA)
| Traditional Safe Harbor 401(k) | Qualified Automatic Contribution Arrangement (ACA) | |
|---|---|---|
| Registration | Employees can enroll in the plan themselves, or they can enroll for them. Either way, you have to contribute to the plan according to one of the following formulas. | You must automatically enroll eligible employees in the plan and deduct at least 3% of wages to contribute to the plan unless the employee elects not to participate.
Each year, the employee’s contribution increases by at least 1% until it reaches at least 6%, but the plan can specify that these automatic increases can be as high as 15%. In addition, you must contribute to the plan according to one of the following formulas. |
| contributions | Related contribution The employer matches 100% of the first 3% of the employee’s contribution to the plan and 50% of the next 2%. for example Non-selective contribution |
Related contribution The employer matches 100% of the first 1% of the employee’s contribution to the plan and an additional 50% on the next 5%. for example Non-selective contribution |
| Vetting | Safe Harbor contributions – whether matching or non-matching – are always fully vested. | Safe Harbor contributions—whether matching or non-elective—must be vested in full once the employee completes two years of service. |
Which Safe Harbor Design is Right for Your Organization?
When choosing between a traditional Safe Harbor 401(k) and a QACA, consider these important questions:
- Immediate or delayed vesting?
A traditional Safe Harbor 401(k) is fully vested when employer contributions are made. However, under QACA, those contributions may be subject to a two-year vesting schedule. Employees who leave before two years of service lose the amount in their employer’s contribution account. Deferred funds can be used to offset required employer contributions in future years. - Auto Enroll or Opt In?
Auto-enrolling employees in a 401(k) has been shown to be an effective way to help employees build retirement savings. In the traditional Safe Harbor design, automatic enrollment is optional but required for QACAs. - Related or unsolicited contribution?
With the selected contribution option, a 3% contribution is made to all eligible employees, including those who do not contribute their own money to the plan. With the matching contribution election, contributions are made only to employees who contribute. Because the basic matching formulas of the traditional Safe Harbor 401(k) and QACA differ, the cost to you will vary depending on the number of contributors and the amount they contribute.For example, if you opt for a traditional Safe Harbor design and all eligible employees contribute 5% or more of their salary, your matching cost would be 4% of salary. However, in a typical plan, some employees opt out or choose to contribute less than 5 percent, so your cost is usually less than 4 percent.
On the other hand, if you choose the QACA plan and all eligible employees contribute 6% or more of their wages, your matching costs will be 3.5% of wages.
Safe Harbor 401(k) Deadlines
If you are considering setting up a Safe Harbor 401(k), you should be aware of some important deadlines:
- New plans – For the first year of the plan, employees must have the opportunity to contribute for at least three months. Therefore, for a 401(k) plan that operates on a calendar year (like most plans), the plan must be effective after October 1st.
If you choose a QACA plan or are making matching contributions, employees must be given at least 30 but no more than 90 days notice before the effective date of the plan. Each year thereafter, the notice must be filed between October 1 and December 1.
- Existing plans – You can modify your existing regular 401(k) to add the Safe Harbor feature. If you make a non-elective contribution of 3%, the plan can be modified for the calendar year.
A recent change in the law allows you to stay at the end of next year if you make 4% instead of 3% non-elective contributions. Plans may be amended to add a Safe Harbor match starting at the beginning of the calendar year. In this case, employees must be notified 30 days before the start of the year.
Take the next step
The Everyday 401(k) was built by JP Morgan with you and your employees in mind. If you are interested in setting up a retirement plan for your business and would like to speak with a retirement plan specialist, stop by your local Chase branch, fill out this intake form or call 833-JPM-401K.
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