Chapter 5 - Safe Harbor

Question 1

ADP and ACP Safe Harbor

Answer 1

A plan satisfying the ADP safe harbor may or may not satisfy the ACP safe harbor, but can never satisfy the ACP safe harbor without also satisfying the ADP safe harbor. In other words, satisfying the ADP safe harbor is a condition for satisfying the ACP safe harbor.

Question 2

Safe Harbor Facts to Memorize

Answer 2

1. Conditions like last-day employment are not allowed for safe harbor contributions.
2. A safe harbor 401(k) plan that satisfies the ADP safe harbor with matching contributions may satisfy top-heavy minimum requirements.
3. HCEs may be excluded from safe harbor contribution. They must be made available to all NHCEs though.
4. Matching contributions can be on a plan year or on a payroll period basis.

Question 3

Safe Harbor can be stopped mid year?

Answer 3

Yes - Safe harbor 401(k) plans may be amended to discontinue safe harbor contributions during the plan year.

Question 4

Safe Harbor Formulas

Answer 4

The matching contribution used to satisfy the ADP safe harbor may not increase as the rate of deferral increases.

Matching contributions may not be made in excess of 6% of compensation.

IRC 401(k)(12) - Traditional Safe Harbor basic match is 100% on the first 3% plus 50% on the next 2%.

IRC 401(k)(13) - PPA Safe harbor or the QACA safe harbor basic match is 100% of elective deferrals on up to 1% of comp plus 50% on the next 5%.

Question 5

Safe Harbor Plans and New Plans

Answer 5

A new plan may not be a safe harbor plan for the first plan year unless the first plan year is at least three months long and the 401(k) arrangement is in effect for at least three months for that first year.

Question 6

Safe Harbor Annual Notice for the 401(k)(12)

Answer 6

Safe harbor 401(k)(12) plan. The annual written notice must contain the following information:

1. the safe harbor matching or nonelective formula used in the plan,
2. any contributions under the plan (including the potential for a discretionary matching contribution) and the conditions under which such contributions are made,
3. the plan to which the safe harbor contributions are made, if different from the plan that includes the 401(k) arrangement,
4. the type and amount of compensation that can be deferred, 5. how to make deferral elections, including any administrative requirements that apply to such elections,
5. the periods available under the plan for making a cash or deferred election,
6. the withdrawal and vesting provisions applicable to contributions under the plan.

Note: The employer may supply much of the information required in the safe harbor notice in the SPD and cross-reference to the appropriate SPD sections in the safe harbor notice. This cross-reference option is available for information described in items (2), (3), and (4). The other items identified above may not be cross-referenced in the SPD.

Question 7

Safe Harbor Annual Notice for 401(k)(13) QACA Notice

Answer 7

Contents of the QACA safe harbor notice - The QACA safe harbor notice must contain the following additional information:

1. An explanation of the employee’s right under the arrangement to elect not to have elective contributions made on the employee’s behalf (or to elect to have such contributions made at a different percentage); and
2. An explanation of how contributions made under the arrangement will be invested in the absence of any investment election by the employee.

Question 8

Safe Harbor Annual Notice Timing Requirements

Answer 8

Safe harbor 401(k) plan (either (12) or (13)). The annual written notice must be given within a “reasonable time” before the first day of the plan year. The IRS deems this timing requirement to be satisfied if the notice is given between 30 and 90 days before the beginning of the plan year.

For an employee who becomes eligible later than the 90th day before the beginning of the plan year, the timing requirement is deemed satisfied if the notice is given by his date of eligibility (but not earlier than 90-days before his eligibility date).

Question 9

Safe Harbor contribution used to support NDT

Answer 9

Safe harbor contribution may be used to support nondiscrimination testing in a number of ways. An employer may ―triple-dip‖ with the ADP safe harbor nonelective contributions—using them to enable the elective deferrals under the 401(k) arrangement to qualify for the ADP safe harbor, to satisfy the top-heavy minimum contribution obligation for the non-key employees, and to support IRC §401(a)(4) testing (other than permitted disparity) for other employer-provided benefits.

Question 10

Safe Harbor Fixed vs Discretionary Formulas

Answer 10

A discretionary formula that exceeds 4% of
compensation will not satisfy the ACP safe harbor.

This 4% of compensation
restriction does not apply to a fixed matching contribution formula.

If the formula is fixed rather than discretionary, it
satisfies the ACP safe harbor up to 6% of compensation.