Safe Harbor Plan Design Options

FAQ

What is a safe harbor plan design and what are its advantages?

The primary advantage of a safe harbor plan design is the ability to avoid certain compliance testing. However, there may be other advantages to consider depending upon each unique employer’s demographic and economic circumstances, as well as their objectives and goals in sponsoring the plan. Your consultant at the Multnomah Group can help you determine the best design for your plan’s specific circumstances.

Beginning in 1999, employers are permitted to allocate certain types of contributions to their eligible employees in order to satisfy deferral and contribution percentage testing (ADP and ACP, respectively) without actually having to conduct such testing. While they test different types of contributions, ADP and ACP testing both seek to ensure that non-highly compensated employees and highly compensated employees benefits from the retirement plan at relatively equal levels.²

A safe harbor plan design must provide for employer contributions that are fully vested when made. These contributions may be employer matching contributions (made to employees who defer their compensation to the plan), or nonelective employer contributions (made to all eligible employees regardless of whether they make elective deferrals).

What are the safe harbor plan design options?

The most commonly used safe harbor plan design options are summarized below.

1. Safe Harbor Nonelective Contributions

The employer makes a safe harbor nonelective contribution equal to at least 3% of compensation to all eligible employees regardless of whether the employee makes salary deferrals to the plan. The nonelective contribution must be immediately vested, but is subject to certain eligibility and distribution restrictions. The nonelective contribution is typically fixed at a specified percentage, and may be designed to be tentative depending upon the employer’s need and/or ability to make such a contribution each year. If the contribution is designed to be tentative it must still be at least 3% of compensation and additional requirements will apply.

2. Safe Harbor Matching Contributions

Employers have two options for safe harbor matching contributions. The first option is a matching contribution equal to 100% of the eligible employee’s deferrals up to 3% of compensation, plus 50% percent of the deferrals on the next 2% of compensation. Alternatively, the plan may adopt a safe harbor matching contribution formula equal 100% of the eligible employee’s deferrals up to at least 4% of compensation. In general, no “employment on the last day of the plan year” and/or annual hours of service requirement may apply to the safe harbor match contribution. Additionally, safe harbor matching contributions must be immediately vested and must be made on elective deferral contributions, Roth deferral contributions, and catch-up elective deferral contributions. Depending on the design, additional requirements may apply.

3. Safe Harbor Contributions with an Automatic Enrollment Feature

Since 2007, employers may design their safe harbor contribution formulas to also include an automatic enrollment feature with regard to employee deferrals whereby employees’ compensation is automatically reduced by a certain percentage unless the participant opts out. This type of design is referred to as a qualified automatic contribution arrangement (QACA). The automatic enrollment feature allows for a 2 year cliff vesting schedule, as compared to immediate vesting for the traditional safe harbor formulas.

To constitute a safe harbor QACA, the automatic deferral percentage may not exceed 10%, but must be at least 3% through the end of the first full plan year that the automatic deferral is in effect, 4% during the second plan year, 5% during the third plan year, and 6% for any subsequent plan years. The employer contribution must be either a matching contribution (equal to 100% on the first 1%, plus 50% on the next 5%, for a total matching contribution of 3.5%) or a nonelective contribution equal to at least 3% of compensation.

Will my plan need to undergo any form of nondiscrimination compliance testing if my employer adopts a safe harbor plan design?

Depending upon the safe harbor design you select for your plan, certain compliance testing may still need to be conducted. Additionally, a safe harbor plan design does not absolve a plan sponsor from ensuring compliance with applicable contribution and compensation limits. These limits must continue to be monitored even if the plan adopts a safe harbor design.

Are safe harbor contributions made by the employer recordkept separately from other types of contributions?

Your plan’s recordkeeper must track safe harbor contributions separately from other types of plan contributions because of unique distribution, eligibility and vesting restrictions applicable to safe harbor contributions.

By when must safe harbor contributions be made?

A plan can make safe harbor contributions per payroll, monthly, quarterly, or annually. The plan document must usually specify the timing of the safe harbor contributions. Depending upon the timing of safe harbor contributions, the employer may need to “true-up” participant accounts at the end of a plan year. Employers subject to income tax must be sure to deposit the safe harbor contribution by the employer’s tax return filing deadline, including extensions.

Can the employer make a contribution in addition to the safe harbor contribution?

If desired, an employer may make contributions on behalf of employees in addition to the safe harbor contributions. Secondary employer contributions are not necessarily subject to the same eligibility, vesting and distribution restrictions as are applicable to safe harbor contributions; however, additional restrictions will apply, and certain compliance testing may need to be performed depending upon the design of the secondary contribution.

What participant notices are required if my employer adopts a safe harbor plan design?

An initial safe harbor notice must be provided to employees before they enter the plan. An annual safe harbor notice must be provided to all eligible employees within 30-90 days of the beginning of each plan year. The notice must specify the safe harbor contribution formula, provide administrative information on how and when contributions are made to and can be withdrawn from the plan, and describe any other employer contributions that are made to participants. An employer can satisfy the notice requirement by providing the notice either in hard-copy written form or electronically, as long as certain additional electronic delivery requirements are met. Special notice requirements apply to plans that wish to make “tentative” safe harbor contributions from year to year.

What if my employer cannot make the stated safe harbor contribution?

Under proposed regulations applicable since May 18, 2009, an employer incurring a “substantial business hardship” can reduce or suspend safe harbor contributions after meeting certain additional requirements.

In summary, what are the general requirements associated with a safe harbor plan design?

The general requirements for adopting a safe harbor plan design are:

Amend the plan document to adopt a safe harbor provision;
Maintain the safe harbor plan status throughout the entire plan year, subject to certain exceptions;
Notify each eligible employee of their rights and obligations under the plan before they enter the plan and annually within 30-90 days before the beginning of each plan year; and
Make the safe harbor contributions at the contribution level stated in the plan document, unless the employer has sustained a “substantial business hardship.”

Additional requirements may apply depending upon the safe harbor design selected by the employer.

Where can I find additional information regarding safe harbor plan design features and requirements?

Your consultant at the Multnomah Group can help you determine whether a safe harbor design would be advantageous for your plan, and can recommend design options that will help you achieve your overall objectives in sponsoring such a plan.

Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Multnomah Group does not provide legal or tax advice.