Deadline to Adopt Safe Harbor 401(k) Approaching
If you were considering adopting a brand new safe harbor 401(k) plan, or were contemplating adding 401(k) features to an existing profit sharing plan, the deadline to do so is fast approaching. You would need to adopt and implement the plan by no later than October 1, 2016 if your plan was to operate on a calendar year and you wanted the safe harbor to be effective for the remainder of 2016. If you wish to turn a "traditional" 401(k) plan--that is, a non-safe harbor 401(k)--into a safe harbor plan, the deadline to do so is January 1, 2017 for an effective date in 2017. Remember too that every safe harbor plan must provide employees with a notice outlining what safe harbor contribution will be allocated and additional information about the plan. This notice must be provided between October 1, 2016 and December 1, 2016 for calendar year plans that will have safe harbor provisions in effect for 2017.
Non-safe harbor 401(k) plans have to meet two specific nondiscrimination tests that a safe harbor plan does not. The first is the Average Deferral Percentage (ADP) test, in which highly compensated employees (HCEs) cannot contribute significantly more on average than the average percentage of compensation of nonhighly compensated employees (NHCEs), as illustrated below:
|NHCE Avg Percentage||Maximum HCE Avg Percentage|
|2% or less||NHCE % × 2|
|2%–8%||NHCE % + 2|
|more than 8%||NHCE % × 1.25|
Similarly, if the plan has a nonsafe harbor matching component, it too must pass a nondiscrimination test known as the Average Contribution Percentage (ACP), similar to the ADP test but applied to any employer match.
The advantage of a safe harbor 401(k) plan is that by making a designated match that meets IRS criteria, both the ADP and ACP tests are deemed to pass. The required employer contribution must meet at least one of the following:
- A match equal to 100 percent of the first three percent of eligible compensation and 50 percent of the next two percent contributed to the plan by each participant; or
- A nonelective contribution to all eligible participants equal to three percent of eligible compensation.
Thus, if you're considering a safe harbor 401(k) plan for the near future, you'll need to act quickly.
Posted on September 14, 2016 by Lori Kiess, Account Manager-Retirement Plans