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401(k) Safe Harbor FAQs with Example

Q.         What is a safe harbor 401(k) plan?




As a general rule, 401(k) plans must satisfy certain non-discrimination requirements to ensure the plan does not discriminate in favor of the plan sponsor’s principals.  These non-discrimination requirements can limit, sometimes very significantly, the principals’ 401(k) contributions.


Safe harbor 401(k) plans, however, do not need to satisfy these non-discrimination requirements.  Therefore, the principals can contribute as much 401(k) contributions as they want since they are not limited by the otherwise applicable non-discrimination testing.

Q.        What are the IRS requirements for safe harbor 401(k) plans?




To satisfy the IRS requirements for a safe harbor 401(k) plan, the plan sponsor must:


(a) adopt a compliant plan document;

(b) send annual safe harbor notices to all eligible employees; and

(c) contribute safe-harbor employer contributions to eligible employees.


Q.        What are the permissible safe harbor employer contribution formulas?



There are three options:


(a) Non-elective contribution (provided to all eligible employees) of at least 3% of pay


(b) Basic matching contribution (provided only to those employees who contribute part of their salary to the plan), structured as follows:

• 100% of the first 3% of pay that is contributed, and

• 50% of the next 2% of pay that is contributed

• for a maximum matching contribution of 4% of pay


(c) Enhanced matching contribution


This safe-harbor contribution must be 100% immediately vested.

Q.        What types of plan sponsors are good candidates for safe harbor 401(k) plans?



Many small employers have difficulty satisfying the IRS non-discrimination requirements applicable to 401(k) plans because rank-and-file employees tend to contribute small amounts of pay to the plan if they contribute anything at all.


Those employers are ideal candidates for safe-harbor 401(k) plans.