Safe Harbor for 2010
Rev. 08/21/09; E-mail Alert 2009-13

It will soon be time to consider whether to start or continue a safe harbor 401(k) plan for next year. Obviously, the harsh economic times have influenced the future use of the guaranteed NEC option and brought new favor to the use of the flexible NEC. In some cases, all employer contributions have been stopped with a hope that they can be continued later. For those employers able to continue or start safe harbor contributions, the time to consider them for 2010 is near as is the time to amend a plan to add (or eliminate) a safe harbor 401(k) provision to a calendar year plan for the 2010 year.

The main advantage to becoming a safe harbor plan is that for the price of a safe harbor employer contribution, the nondiscrimination tests that apply to employee deferrals (ADP) and matching contributions (ACP) are deemed satisfied and, thus, the Highly Compensated Employees (HCEs) may make the maximum allowable deferral of compensation without the need for the plan to pass the discrimination tests. 

Another advantage to becoming safe harbor is that a top heavy plan that adheres to the specific rules will be exempt from being top-heavy. Note that this is an annual determination.

Since 2008, in addition to what has become known as the traditional safe harbor 401(k), we also have the Qualified Automatic Contribution Arrangement (QACA) which follows the traditional safe harbor 401(k) rules except for several new QACA features.

Managing expectations is always an important part of any sales process so that an employer is not disappointed in the product upon discovery of an undesired feature after the plan is adopted. Some of the features that employers need to understand about traditional safe harbor 401(k) plans are:

1. Full vesting of safe harbor contributions when there is turnover.
2. Cost of matching versus NEC contribution.
3. No allocation requirements. Thus, the NEC is to be made to all eligible NHCEs, even those who may have left on less than favorable terms before year end.

For more information on safe harbor plans, click here for our safe harbor 401(k) chart.

To learn more about safe harbor 401(k) plans, click here for information on our upcoming eSeminar.