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  • Writer's pictureSamantha Diggs

Safe Harbor 401(k) Rules: An Overview

Updated: Mar 11, 2022

Safe harbor 401(k) plans are among the most popular types of 401(k) plans used by small businesses. These plans help owners maximize the annual contributions made to their accounts because they automatically pass ADP/ACP and other top-heavy nondiscrimination tests. However, to achieve the Safe Harbor status, the plan must meet certain contributions and participant disclosure requirements. Let's talk a little more about the rules that Safe Harbor plans bring with them.

If, as an employer, you currently offer a 401(k) plan, you can already take the next step and offer a Safe Harbor match. If you're in the process of signing up for a new 401(k) plan, you may ask about the Safe Harbor option in advance; most 401(k) providers will have this as an option, especially for small companies.

See, Safe Harbor plans are particularly valuable for small and medium-sized businesses, especially if key employees want to actively contribute to the company 401(k) plan.

For companies with ten or fewer employees, having two key employees who want to heavily contribute to their 401(k) can make the plan top-heavy. Changing to a Safe Harbor plan allows these employees to make their preferred level of contributions and keeps your plan within compliance.

If your company has between 50 and 80 employees, the non-highly compensated employees (non-HCEs) may not be contributing enough for the highly compensated employees (HCEs) to max out their contributions. A Safe Harbor plan gives them the freedom to more fully contribute without endangering the whole company's plan. This can help incentivize HCEs to continue their employment with you.

Let's look at some of the deadlines that safe harbor plans have:

October 1st is the deadline to start a new safe harbor plan for the current calendar year. This is because the IRS requires that a Safe Harbor plan must have a minimum of a 3-month plan year in the initial year it is established.

November 1st. There is a deadline for employee notices which falls on December 1st. Therefore, the month of November represents two deadlines:

  • If you have an existing Safe Harbor plan and would like to change the type of Safe Harbor, this must be decided before December 1st.

  • If you have an existing 401(k) plan that is not a Safe Harbor and you want to amend your legal plan documents to add a Safe Harbor feature, you must let your provider know before December 1st.

December 1st is the date by which all Safe Harbor plans, both old and new, must have distributed a notice to their employees. This must be done at least 30 days before the first day of the year, so a plan that will be Safe Harbor in 2021, the deadline is December 1, 2020.

Finally, January 1st is the date on which existing 401(k) plans can begin anew as Safe Harbor plans. If you have an existing regular 401(k) plan, you cannot add Safe Harbor provisions to it in the middle of the year.

The employer can decide, on an annual prospective basis, which Safe Harbor to use. There is no minimum number of years that the Safe Harbor must be used. The Safe Harbor match must generally be effective at the beginning of the plan year, for the entire plan year.

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