K-1 Q: What is a safe harbor 401(k) plan? -TOP

A: A safe harbor 401(k) plan is a 401(k) plan under which an employer will no longer be required to perform nondiscrimination testing of elective contributions or matching contributions. To land within the safe harbor, a 401(k) plan must meet certain employer contribution requirements and, like a SIMPLE 401(k) plan, must provide for 100 percent immediate vesting of these contributions. Other limitations that apply to SIMPLE 401(k) plans--reduced elective deferral limits and exclusive plan requirements--do not apply to safe harbor 401(k) plans. This should make safe harbor 401(k) plans attractive to more employers than are attracted to the SIMPLE 401(k) option.

K-2 Q: When can an employer adopt a safe harbor 401(k) plan? -TOP

A: Employers are able to adopt safe harbor 401(k) plans starting with plan years beginning in 1999.

K-3 Q: What employer contributions are required to be made to a safe harbor 401(k) plan? -TOP

A: Under a safe harbor 401(k) plan, and employer can elect to provide either of the following contributions.
1. A dollar-for-dollar match on elective contributions up to 3 percent of compensation and a 50 cents-oK-the-dollar match on elective contributions between 3 percent and 5 percent of compensation (the basic matching formula); or
2. A 3 percent of compensation nonelective contribution.

K-4 Q: What requirements must be met by a matching contribution in order to qualify for the safe harbor? -TOP

A: To qualify under the safe harbor, a matching contribution must meet two requirements. First, an employer is required to provide to each noK-highly compensated employee a dollar-for-dollar match on salary deferrals up to 3 percent of compensation and a 50 cents­oK-the-dollar match on salary deferrals between 3 percent and 5 percent of compensation. Second, the rate of matching contribution for any highly compensated employee at any rate of salary deferral cannot be greater than the rate of matching contribution provided to noK-highly compensated employees.
Example. S&L Corporation sponsors a 401(k) plan covering the employees of its two divisions, A and B. The rate of matching contribution for Division A satisfies the safe harbor requirements as described above. The rate of matching contribution for Division B is slightly more generous as it extends the dollar-for-dollar match on salary deferrals from 3 to 4 percent of compensation. If any of the employees of Division B are highly compensated while there are noK-highly compensated employees of Division A, the 401(k) plan will no longer be considered a safe harbor plan, since the elective contributions of Division B's highly compensated employees will be matched at a greater rate (dollar for dollar on elective contributions between 3 percent and 4 percent of compensation) than the rate of match for the noK-highly compensated employees of Division A (50 cents on the dollar for elective contributions between 3 percent and 4 percent of compensation).

K-5 Q: Can 401(k) Safe Harbor Plans Provide Matching Contributions on Both Pre-Tax and After-Tax Employee Deferrals? -TOP

A: 401(k) Safe Harbor Plans Can Provide Matching Contributions on Both Pre-Tax and After-Tax Employee Deferrals. 401(k) plans that match employee contributions on both a before-tax and after-tax basis, can meet the safe harbor. Such plans can also treat after-tax contributions in the same manner as before-tax deferrals when a plan provides for a 12-month suspension of contributions upon a hardship withdrawal. These changes expand the universe of plans that can consider a safe harbor design.

K-6 Q: Can Profit-Sharing Plans Add 401(k) Safe Harbor Provisions During a Plan Year? -TOP

A: Profit-Sharing Plans Can Add 401(k) Safe Harbor Provisions During a Plan Year. An existing profit-sharing plan can be amended as late as 3 months prior to the end of a plan year (October 1 for calendar year plans) to add 401(k) provisions that satisfy the safe harbor.

K-7 Q: May matching contributions be made on a discretionary basis in a safe harbor 401(k) plan under Code Section? -TOP

A: No. Unless an employer elects to make a nonelective contribution of 3 percent of compensation, an employer is required to make the matching contributions at the level set forth in Code Section 401(k)(12). Last day and/or minimum hours requirements for matching contributions are not permitted.

K-8 Q: Can other matching contribution formulas satisfy the safe harbor? -TOP

A: Yes. If the aggregate amount of matching contributions under an enhanced matching formula at any given rate of elective contributions is at least equal to the aggregate amount of matching contributions that would be made under the basic matching formula, (K-7) then the alternative formula will satisfy the safe harbor. An alternative formula will not satisfy the safe harbor, however, if the rate of matching contribution increases or if, at any rate of elective contributions, the rate of matching contribution that would apply with respect to any HCE who is an eligible employee is greater than the rate of matching contributions that would apply with respect to an NHCE who is an eligible employee and who has the same rate of elective contributions. 

K-9 Q: Is there any other restriction that applies to safe harbor formulas? -TOP

A: Strangely enough, a match formula will fall, in part, outside the safe harbor if the formula is too generous. If a 401(k) plan matches elective contributions in excess of 6 percent of compensation, the safe harbor no longer applies to the matching contribution, and those contributions together with any after-tax employee contributions are subject to discrimination testing. The safe harbor still applies, however, to the elective contribution part of the plan. 
Example. Telinda Corporation sponsors a 401(k) plan that satisfies the safe harbor formula here, but it also provides an additional match at the rate of 10 cents on the dollar on elective contributions between 5 percent and 10 percent of compensation. The safe harbor no longer applies to the matching component of the 401 (k) plan because there is a matching contribution with respect to elective contributions in excess of 6 percent of compensation. The safe harbor continues to apply to the elective contribution component of the plan; hence, elective contributions will be exempt from discrimination testing.

K-10 Q: May an employer make other contributions to a safe harbor 401(k) plan? -TOP

A: Yes. Unlike SIMPLE 401(k) plans, in the case of a safe harbor 401(k) plan, an employer is permitted to make other contributions. For example, an employer that provides a safe harbor matching contribution could also make a profit sharing contribution. This flexibility is not afforded to the sponsor of a SIMPLE 401(k) plan.

K-11 Q: What conditions, if any, can be placed on the receipt of the matching contribution or the 3 percent nonelective contribution in a safe harbor 401(k) plan? -TOP

A: No conditions may be imposed. Therefore, once an employee has satisfied any age and service requirements under the 401(k) plan and has become a participant, the employer must make the required contribution (match or 3 percent-of-compensation nonelective contribution) whether or not the participant is employed on the last day of the plan year or has completed 1,000 hours of service during the plan year. In this respect a SIMPLE 401(k) plan has the advantage, since the 2 percent of compensation nonelective contribution under a SIMPLE 401(k) plan need not be given to participants whose compensation during the plan year is under $5,000.

K-12 Q: Are safe harbor 401(k) plans exempt from the top-heavy rules? -TOP

A: Safe harbor 401(k) plans, unlike SIMPLE 401(k) plans, are not specifically exempt from the top-heavy rules. However, under present law, 3 percent-of-pay nonelective contributions made to meet the safe harbor can be credited toward an employer's top­heavy minimum contribution obligation. [Treas Reg § 1.416-1, Q&A M-18] Pointing to the Committee Reports discussing Section 1433 of SBJPA, some commentators believe that matching contributions to a top-heavy safe harbor 401(k) plan can also be used by an employer to help satisfy its minimum contribution obligation.

K-13 Q: What special vesting rules apply to safe harbor 401(k) plans? -TOP

A: A safe harbor 401(k) plan, like a SIMPLE 401(k) plan, must provide that the safe harbor matching or 3 percent-of-compensation nonelective contribution be 100 percent immediately vested. Any other employer contributions to a safe harbor 401(k) plan can be made subject to a vesting schedule.

K-14 Q: How much time does an employer have before committing to Safe Harbor? -TOP

A: Instead of being required to commit to a safe harbor design before the start of a plan year, an employer can wait up to 30 days before the last day of a plan year (i.e. November 30th) to decide to use the safe harbor nonelective contribution method (generally, a 3% across-the-board contribution to all eligible participants). Two notices are required. First, the standard safe harbor notice, provided at least 30 days prior to the beginning of a plan year, must state (1) that the plan may be amended during the plan year to allow for the safe harbor contribution, and (2) that the plan sponsor will provide a supplemental notice to eligible employees at least 30 days before the end of the plan year informing them of such amendment. The supplemental notice can be included in the safe-harbor notice for the following plan year. Employers can choose each plan year whether to make safe harbor nonelective contributions, which provides significant flexibility.

K-15 Q: When can an employer discontinue Safe Harbor? -TOP

A: During a plan year, safe harbor matching contributions can be discontinued for the remainder of the plan year as long as the plan satisfies the ADP/ACP tests for the entire plan year. Employers must notify participants at least 30 days in advance of the discontinuance of the safe harbor. The notice must explain the consequences and indicate that eligible participants have a reasonable period of time to change their deferral elections in light of the suspension of matching contributions. The plan can continue to make matching contributions that do not meet the safe harbor.

K-16 Q: Can Safe Harbor plans provide for both pre-tax ans after-tax contributions? -TOP

A: 401(k) plans that match employee contributions on both a before-tax and after-tax basis, can meet the safe harbor. Such plans can also treat after-tax contributions in the same manner as before-tax deferrals when a plan provides for a 12-month suspension of contributions upon a hardship withdrawal. These changes expand the universe of plans that can consider a safe harbor design.

K-17 Q: Can profit-sharing plans add 401(k) Safe Harbor during the plan year? -TOP

A: An existing profit-sharing plan can be amended as late as 3 months prior to the end of a plan year (October 1 for calendar year plans) to add 401(k) provisions that satisfy the safe harbor.

K-18 Q: How does a Safe-Harbor Plan compare with an Enhanced Match plan? -TOP

A: Safe Harbor Plan: 100% nonelective matching contribution to first 3% of payroll, then 50% nonelective matching contribution from 3-5% of payroll. All Safe Harbor contributions 100% vested.

 Enhanced Match: 100% nonelective matching contribution to first 4% of payroll. All Enhanced contributions 100% vested.

K-19 Q: What is the "Safe Harbor Notice" and where is it provided? -TOP

A: The Safe Harbor Notice is government-sanctioned text that does not relate to the safe-harbor matching provisions of a 401(k), but rather the options and rights of persons who are receiving distributions from a pension plan. The text of the Safe Harbor Notice can be found in the Summary Plan Description provided to all 401(k) Pro clients.

K-20 Q: SAMPLE SAFE HARBOR NOTICE -TOP

A: 
IMPORTANT DISCLAIMER: This Sample Safe Harbor Notice has been included in the company’s Summary Plan Description for informational purposes only. At the present time there is NO actual or implied commitment on the part of your employer to provide safe harbor benefits to eligible employees.
Providing this sample notice in this Summary Plan Description should not be construed as an implied or overt commitment on the part of your employer to operate the 401(k) plan in accordance with the following safe harbor guidelines, either now or in the future. This sample notice is provided herein merely to describe, in general terms, various safe harbor arrangements your employer may elect at some future date.
If your employer decides at some future date to operate the company’s 401(k) plan as a safe harbor plan, you will be notified in writing by the Plan Administrator, and such written notification will describe in detail the manner and amount of your employer’s contribution to your 401(k) account.
NOTIFICATION TO ELIGIBLE EMPLOYEES
I. OPPORTUNITY TO PARTICIPATE IN SAFE HARBOR 401(K) PLAN
You are eligible to make salary reduction contributions to the company’s 401(k) plan. This notice and the summary plan description (SPD) provide you with information that you should consider before you decide whether to start, continue, or change your salary reduction agreement.
II. SALARY REDUCTION ELECTION
As a participant in the company plan, you may elect to defer a portion of your compensation each year instead of receiving that amount in cash. To determine the amount of your salary reduction, if any, you should review the SPD. Any salary reduction you elect will be nonforfeitable at all times.
III. EMPLOYER CONTRIBUTION ELECTION
To help you make an informed decision on the level of your own salary reduction contributions, if any, your employer must declare the type of contribution it will make within a reasonable period of time prior to the plan year. Your employer elects to contribute a SAFE HARBOR 401(k) contribution (employer must select either (1), (2) or (3):
(1). Basic Matching Contribution: A matching contribution equal to 100% of your salary reduction contribution, up to 3% of your annual compensation, plus 50% of your salary reduction contribution for the entire year in excess of 3% of your compensation for such period but not in excess of 5% of your annual compensation.
(2). Enhanced Matching Contribution: A matching contribution equal to your salary reduction contribution for the entire year up to a fixed percentage (___ %) of your annual compensation, plus a fixed percentage (____%) of your salary reduction contribution for the entire year in excess of a fixed percentage (____%) of your annual compensation.
NOTE: The Enhanced Matching Contribution formula, at any rate of salary reduction contribution, must provide an annual amount, at least as generous as the matching contributions that would be provided under (1) above.
(3). A Nonelective Contribution equal to a percentage not less than 3% of your compensation. A supplemental notice will be distributed to you at least 30 days prior to the end of the Plan Year informing you of the amount of the Nonelective Contribution.
IV. EMPLOYEE CONTRIBUTIONS
If you are eligible to make a salary reduction contribution, but have not attained age 21 and completed a Year of Service, you will not be eligible to share in the employer contribution selected above.
You will be eligible to share in the contribution selected above (unless modified by this Notice) when you become a participant in accordance with the SPD.
Note: All benefits attributable to contributions made pursuant to either (1), (2), or (3) are nonforfeitable at all times. Withdrawal of such amounts, if the plan permits, may not be made earlier than: your separation from service, total and permanent disability, death or attainment of age 59 ½.
V. OTHER EMPLOYER CONTRIBUTIONS
For the plan year, certain eligible employees may participate in other employer contributions. You should review the SPD.
VI. ADMINISTRATIVE PROCEDURES
The amount you elect to defer will be deducted from your pay in accordance with a procedure established by your employer and administrator. The procedure will require that you enroll in the company’s 401(k) plan.
If your employer elects to make a Basic Matching Contribution, an Enhanced Matching Contribution, a Nonelective Contribution or a contribution to another plan, as provided above, you may make or modify a salary reduction election during the 30-day period immediately preceding the Plan Year. For the Plan Year you become eligible to make salary reduction contributions, the 30-day election period is deemed satisfied if you can make a salary reduction election during a 30-day period that includes the date you become eligible or the date before. Your employer will notify you at least 30 days (and no more than 90 days) prior to the 30-day election period that you can make a salary reduction election or modify a prior election during that period.
You are also permitted to revoke your election at any time during the Plan Year.
If you decide to start or change your salary reduction, you must complete a 401(k) plan enrollment application and return it to the Plan administrator.

K-21 Q: What is required to qualify under safe harbor matching? -TOP

A: If the 401k plan has employer matching provisions, matching must be at least as generous as the "safe harbor matching formula." To qualify under safe harbor matching, two requirements must be met:
The employer is required to provide each noK-highly compensated employee who participates in the 401k with a dollar-for-dollar match on his or her salary deferrals up to 3 percent of compensation, and a 50 cents-oK-the-dollar match on salary deferrals between 3 percent and 5 percent of compensation. As an alternative approach, a matching safe harbor contribution can be achieved by making an "enhanced match", which is dollar-for-dollar up to the first 4 percent of compensation.
The percentage of matching contributions for any highly-compensated employee at any percentage of salary deferral cannot exceed the percentage of matching contributions provided to noK-highly compensated employees.

K-22 Q: In a Safe Harbor plan with enhanced matching, is there a maximum employer match? -TOP

A: Yes. The maximum for a nondiscretionary safe harbor match is on the employee's deferral, must be fully vested, and cannot exceed 6% of compensation. The match percentage or ratio (i.e. $6 match for each $1 of deferral) is not limited so long as the aggregate amount matched does not exceed 6% of comp.

K-23 Q: The employer matching contribution 401(k) plan safe harbor now satisfies the top-heavy rules". Does this mean that if a 401(k)plan is a safe harbor plan using the safe harbor matching contribution, they do not need to run the top heavy test? -TOP

A: Yes. Under EGTRRA a safe harbor 401(k) plan is deemed not to be top heavy.(TAG)

K-24 Q: Are safe harbor 401(k) plans exempt from the requirement to run top-heavy tests? -TOP

A: Yes. Under EGTRRA a safe harbor 401(k) plan is deemed not to be top-heavy.

K-25 Q: A sole proprietor with 1 employee has a Safe Harbor plan, making the matching safe harbor contributions. The one employee does not participate in the plan, so would not receive the Safe Harbor match. Can the sole proprietor give themselves the matching contribution? -TOP

A: Yes, as long as the match meets the requirements for the safe harbor match, then discrimination testing is not required. you may use a safe harbor match for the one participant who is deferring. Also under EGTRRA, a safe harbor 401(k) plan is deemed not to be top heavy. However, if there is a match on any catch up contributions, the plan must be ACP tested. That means the full matching contribution, not just the match on the catch up.

K-26 Q: If a 401(k) plan is a Safe Harbor plan, making the 3% of compensation contribution, and they want to also have employer matching, can they only match up to the first 6% of deferrals? Can they match 100% or more of the first 6% of deferrals? -TOP

A: In addition to a 3% noK-elective safe harbor contribution, the plan can have either or both of the following: 1. A fixed match, as long as the deferral upon which the match is based does not exceed 6% of compensation. For example, a plan could state that the employer will match 150% of the deferral, but only on the amount of the deferral that does not exceed 6% of the participants compensation. 2. A discretionary match, as long as the amount of the match does not exceed 4% of the participants compensation.

K-27 Q: If an employer is going to use a fixed match in addition to the 3% noK-elective safe harbor contribution, does it have to be fully vested and indicated as a safe harbor match? -TOP

A: No. The 3% nonelective satisfied the ADP safe harbor, the match can be subject to vesting.