The IRS introduced Safe Harbor Plans in 1999 to remedy the problem of failing
discrimination testing. The plan was designed to encourage maximum participation by HCEs and
avoid the failure of ADP/ACP testing. Safe Harbor 401(k)s are ideal for smaller companies whose
HCEs would like to maximize deferrals. It is also a good choice for companies that have a payroll
gap between the salaries of HCEs and non-HCEs.
Safe Harbor plans offer flexibility similar to that found in non-Safe Harbor Plans; however,
there are significant differences. Safe Harbor Plans require a mandatory matching contribution,
called a qualified non-elective contribution (QNEC), and 100% immediate vesting. In addition to
the mandatory matching contribution, plan sponsors can make profit sharing contributions
and attach a vesting schedule.
| SAFE HARBOR 401(k) Plan Overview |
| Employer Eligibility |
Businesses, partnerships, S-Corps, C-Corps, and certain
nonprofit groups (no governmental)
|
| Employee Eligibility |
Plan design decides eligibility.
Maximum criteria are:
- 1 year of service
- Age 21
- 1000 hours worked per year (full time)
- Union employees can be excluded
- Non-resident aliens can be excluded
|
| Type of Contribution |
- Employee Deferral
- Mandatory Employer Match
- Qualified Non-Elective Contribution
|
| Employee Deferral Limit |
The lesser of 15% or $11,000 (2002)
|
| Employer Contribution |
Either:
- Qualified Matching Contribution:
Mandatory Match
Employer matches $1/$1 up to 3% and then $.50/$1 on
the next 2% of compensation for participating employees
- Or -
- Qualified Non-Elective Contribution:
Plan sponsor makes a contribution across the board to
all eligible employees of 3% of compensation, regardless
of participation
|
| Employer Match Limit |
Total employer contribution cannot exceed 15% of total
eligible compensation
|
| Testing |
Some testing still required
Safe Harbor eliminates ADP/ACP testing
|
| Administration Cost |
Base – plus – participant fee (usually lowered cost than
straight 401(k))
|
| Vesting Schedule |
None. All contributions are 100% vested
|
| Third-Party Administrator Required |
Yes. Recordkeeper is also recommended
(Armada Plan Direct offers recordkeeping)
|
| Document Required |
Yes. Usually a prototype plan document. The document allows
the plan sponsor to decide the type of contribution, outline which
employees are eligible, allow loans and hardship withdrawals,
allow rollovers, and/or place limits on employee deferrals.
|
| Notification Period |
30 days prior to plan start
|
If you would like to download information about Armada Plus Safe Harbor 401(k)
or have additional information mailed to you, click here.
