McKay Hochman - Safe Harbor 401(k) Chart

Safe Harbor 401(k) Chart
Bill Grossman, QPA
May 16, 2003, Rev. Oct. 30, 2003, Rev Dec. 16, 2004

ADP SAFE-HARBOR CONTRIBUTIONS (NO ADP TEST REQUIRED)
3% NONELECTIVE CONTRIBUTION
	1.	No Allocation Requirements may be imposed, such as, a 1,000 hour or last-day requirement.
	2.	100% Vested
	3.	Not available for in-service withdrawal before age 59½, even for hardship
	4.	Can be used to satisfy Top Heavy minimum contribution.
	5.	Can be used towards satisfying cross-testing gateway
	6.	Cannot be used to satisfy permitted disparity
	7.	Available in guaranteed or flexible formula:
		a. Guaranteed provides required 3% each year
		b. Flexible allows employer to decide each year

OR MATCHING CONTRIBUTION A. OR B. BELOW
	---------------------------------------------
	A. BASIC MATCH: 100% of first 3% deferred plus 50% of next 2% deferred
	1.	No Allocation Requirements may be imposed, such as, a 1,000 hour or last-day requirement.
	2.	100% Vested
	3.	Not available for in-service withdrawal before age 59½, even for hardship
	4.	Can be used to satisfy Top Heavy minimum contribution.

	B. ENHANCED MATCH: Matching formula must be at least as generous as the basic formula
	1.	No Allocation Requirements may be imposed, such as, a 1,000 hour or last-day requirement.
	2.	100% Vested
	3.	Not available for in-service withdrawal before age 59½, even for hardship
	4.	Can be used to satisfy Top Heavy minimum contribution
	5.	Rate of match may not increase as deferral percentage increases

NOTE: The top heavy minimum contribution is waived for plans using either the safe harbor basic or enhanced matching formula, provided there is no allocation of any other employer contributions including reallocation of forfeitures. Such a plan would actually be exempt from the top heavy rules.

ACP SAFE-HARBOR CONTRIBUTIONS (NO ACP TEST REQUIRED)
A. One of the Safe Harbor contributions above must be provided.
B.	Once the safe harbor contribution is provided, any non-safe harbor matching formula will satisfy the ACP Safe Harbor if it meets these requirements:

	1.	Allocation of any discretionary matching contribution cannot exceed 4% of compensation
	2.	Deferrals in excess of 6% of compensation may not be matched
	3.	Rate of match does not increase as deferral percentage increases
	4.	Non-safe harbor additional match does not need to be 100% vested
	5.	May permit in-service withdrawals.
	6.	Under the recently proposed regulations, a plan cannot have a 1,000 or last day allocation requirement for any discretionary match . It is not clear whether this is the case prior to the regulations.

Some IMPLEMENTATION issues

	1.	New Safe Harbor 401(k) Plan Issues:
		a.	A safe-harbor 401(k) feature may not be added to an existing profit sharing plan with less than 3 months remaining in plan year.


		b.	A brand new 401(k) plan must have at least 3 months remaining in the short plan year to immediately start a safe harbor. For example, by October 1 for a calendar year plan.


		c.	An exception to the 3 month rule exists for a new business which may establish a safe harbor plan with one month in the plan year.



	2.	A safe-harbor feature may not be added to an existing 401(k) plan during the plan year. The plan may be amended to add the safe harbor as of the next plan year.

	3.	A safe-harbor notice must be provided each year between 30 and 90 days before the next plan year begins. If the flexible nonelective safe harbor contribution will be made, a second notice must be provided 30 days before the end of the plan year.

	4.	A safe-harbor match may be discontinued during the year upon 30 days advance notice to employees. However, ADP and ACP testing will apply for the entire year.
TOP-HEAVY PLAN ISSUES
If the safe-harbor 401(k) plan is top heavy, the employer can get twice the mileage out of its safe-harbor contribution. There are three ways this can happen:
	1.	When a NEC of 3% or more is made to a top-heavy plan, the NEC of 3% or more generally satisfies the top-heavy contribution requirement.

	2.	If the plan is making a safe-harbor match and the plan is top heavy, the match counts towards satisfying the top-heavy minimum contribution for those employees who receive it. For example, if a participant defers 2% and receives a 2% match, when the employer makes the top-heavy contribution, that employee would only have to receive 1% more to satisfy the 3% top-heavy contribution.

	3.	A plan that only permits elective deferrals and contributions that satisfy the ADP and ACP safe harbor provisions is exempt from the top-heavy rules. To be exempt, there cannot be any other employer contribution (i.e., profit sharing contribution) and forfeitures cannot be allocated on a basis other than as a match that satisfies the ACP safe harbor. To further clarify, discretionary matching contributions that do not trigger the ACP test (as described above) may also be made.

Each employer's goals, plan design, contribution sources and demographics form a unique scenario which the employer will wish to discuss with his or her plan provider before finalizing the decision to make the plan a 401(k) safe-harbor plan.