The Pension consultants at Planmark regularly receive calls on a broad array of technical topics related to qualified retirement plans. A recent call with a plan sponsor in Woodstock, Ga is a commonly asked question about Safe Harbor 401(k) Plan Designs. The plan sponsor asked:
““How can I have a 401(k) plan that allows each employee to save the maximum amount each year, regardless of what amount all the other employees contribute?”
Highlights of Discussion
There are three plan design types, called Safe Harbor plans, that when adopted, allow the plan sponsor to automatically satisfy nondiscrimination testing. They are the Safe Harbor-Match plan design, Safe Harbor 3% employer contribution and a qualified automatic contribution arrangement (QACAs).
Safe Harbor – Match: With this plan, eligible employees can choose to participate by deferring a portion of the pay into the plan. The plan sponsor must give a matching contribution to those participants who defer a portion of their pay into the plan. There is a minimum matching formula that has to be used.
Safe Harbor – 3%: This form of safe harbor requires the plan sponsor to make a 3% of pay contribution to all eligible employees — regardless of whether they defer a portion of their pay or not.
QACA safe harbor: A QACA combines a plan sponsor matching contribution and automatic employee enrollment that requires eligible employees to begin deferring at least 3% of their pay into the plan and to annually increase their deferral percentage over the next three years to a maximum of 6%. The employee can also elect not to participate in the plan, if so, the plan sponsor is not required to contribute for them.
Nondiscrimination testing for 401(k) plans (i.e., the actual deferral percentage (ADP), actual
contribution percentage (ACP) and top-heavy tests) can be quite complicated, and if your plan
fails any of these tests, you must take corrective measures or face potential plan disqualification. from the IRS. One way for a plan to automatically satisfy the nondiscrimination testing rules is by adopting one of three safe harbor plan designs.
The Resource Desk is staffed by the pension experts at Planmark Financial Group, Inc., a third-party plan administration firm. Any information provided is for informational purposes only. It cannot be used for the purposes of avoiding penalties and taxes. Planmark does not provide tax or legal advice.
Consumers consult with their tax advisor or attorney regarding their specific situation.