Like the traditional 401(k) plans, Safe Harbor 401(k) plans are also company sponsored retirement plans that provide the same type of benefits as a traditional 401(k) plan. Essentially a safe harbor 401(k) plan is a traditional 401(k) plan with some changes or added features. The following are the similarities and differences of a safe harbor 401(k) plan with regards to a traditional 401(k) plan.
Safe harbor 401(k) plan works on the same principle as traditional 401(k) plan where an eligible employee can contribute pre-tax deferrals to their safe harbor 401(k) account. The contribution limits for a safe harbor 401(k) plan are also same as a traditional 401(k) plan.
As with traditional 401(k) plans, employee’s contributions are fully vested, however, employer contributions can be subject to vesting schedule. Unlike traditional 401(k) plan, employer contributions to safe harbor 401(k) plans are mandatory. Employers have the option to make either matching contributions or they can choose to make non-elective contributions to the employee’s account.
With the matching contribution option, employer contributions are limited to only those employees who elect to defer to the plan. The matching contribution is generally required to be 100% of employee contributions that is a dollar-to-dollar match, up to 3% of the employee’s salary and 50%, that is 50 cents to each dollar, of employee contributions on the next 2% of the salary. However, these matching contributions cannot exceed 6% of the employee’s compensation.
Should the employer choose to make non-elective contributions, they have to make a contribution of minimum 3% of all eligible participants’ contributions. This means that the employer should make annual contributions to the employee’s safe harbor 401(k) account regardless of whether the employee makes a contribution or not.
Employers can also make additional contributions more than the required minimum ones. Although, these are subjected to deductibility limits.
Mandatory employer contributions to the safe harbor 401(k) plan become 100% vested immediately. The employer may additionally choose a graded vesting schedule for the additional contributions.
Also safe harbor plans can retain the flexibility options of traditional 401(k) plans like eligibility, loans or distributions features. Employers also get flexibility with design of the plan where they can decide on the plan’s status as a safe harbor plan in that year. The reporting and disclosure requirement of the safe harbor 401(k) plans are same as that of traditional 401(k) plans where the plans also have an establishment deadline. Generally, new plans have to be established anytime between January 1 and October 1 of the applicable year.
Safe harbor plans, unlike traditional 401(k) plans, have reduced complexity as they are automatically deemed to pass the ADP and ACP Non-discrimination Tests which are required by traditional 401(k) plans annually. This proves beneficial to ‘Highly Compensated Employees’ (HCE) as they can steer clear of corrective distributions and can contribute maximum deferrals regardless of the participation from non-HCEs. If this is combined with the profit sharing New Comparability feature, these plans can enable HCEs to get maximum contributions in a defined contributions plan.
These plans offer savings for not only the employees but for employers also where employers receive tax saving for the contributions made. Employees receive the same tax advantage as with a traditional 401(k) plan.
All these features such as tax benefits, maximum employer contribution, no discrimination testing make the safe harbor 401(k) a lucrative option for employers and employees alike. Hence, these features and benefits can be used by employers for recruiting employees and/or their retention.
