Safe Harbor 401(k) Establishment Deadline Fast Approaching
There are several types of 401(k) plans available to employers - Traditional 401(k) plans, Safe Harbor 401(k) plans and SIMPLE 401(k) plans. Different rules apply to each. We will focus, here on the Safe Harbor plan.
Safe Harbor October 1 Deadline
The Safe Harbor 401(k) plan, in exchange for contributing to the account of a non-highly compensated employees as little as a fully-vested 3% of compensation profit sharing contribution, or a 4% of compensation matching contribution, permits Highly Compensated employees (5% owners; employees earning more than $120,000) to contribute the maximum deferral amount and receive an associated match exempt from the restrictions normally imposed by the ADP and ACP tests.
401(k) plans can be adopted at any time during the plan year However, a Safe Harbor 401(k) plan must have at least a 3-month plan year. Therefore, a calendar year Safe Harbor 401(k) plan must be established by October 1st in order to receive an exemption from the ADP and ACP tests.
Before we know it, the October 1st deadline for establishing a new Safe Harbor 401(k) plan for the current calendar year (2017) will be upon us. To ensure your ability to comply with the requirements, here are some reminders for your consideration – and, of course, please feel free to contact us with your questions and concerns!
It is critical that the plan document is drafted and signed by October first. Furthermore it usually takes 4 to 6 weeks to select an investment record keeper, schedule enrollment meetings and employee education. It is imperative that this process is completed and in place by the first scheduled pay period in October.
A Safe Harbor 401(k) plan is like a Traditional 401(k) plan, but, among other things, it must provide for employer contributions that are fully vested. These contributions may be employer matching contributions limited to employees who defer or employer contributions made on behalf of all eligible employees, regardless of whether they make elective deferrals. Safe Harbor 401(k) plans are not subject to complex annual nondiscrimination testing rules which apply to Traditional 401(k) plans.
Employers sponsoring Safe Harbor 401(k) plans must satisfy certain notice requirements. The notice requirements are satisfied if each eligible employee for the plan year is given written notice of the employee's rights and obligations under the plan and the notice satisfies the content and timing requirements. QBI will provide the appropriate notice for your plan and inform you concerning timing of its distribution.
Elective deferrals and associated matching contributions made to a 401(k) plan must normally satisfy certain non-discrimination rules known as the Actual Deferral Percentage ("ADP") and the Actual Contribution Percentage ("ACP") tests. These tests restrict the amount of elective deferral and matching contributions that highly compensated employees ("HCEs") may receive under a tax-qualified retirement plan which is not Safe Harbor.
By using the Safe Harbor rules, it is possible for a new 401(k) plan to be established, or for an existing profit sharing plan without a 401(k) feature to be amended to incorporate 401(k) and Safe Harbor features for as little as three months. This will allow an HCE to contribute the maximum deferral to the plan. In addition, when designed correctly, the profit-sharing feature associated with such a plan may be effective for the full 12-month plan year allowing the maximum possible total contribution to the plan.
As you might expect, advance preparation and planning is always necessary to establish a new tax-qualified plan or redesign an existing one. The same holds true for Safe Harbor plan designs. So now is the time to consider whether a Safe Harbor feature is right for your company or your client's plan to ensure that it can be fully operational in advance of the October 1st deadline.