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Safe Harbor
If you find that your plan has difficulty passing the ADP test or your plan is Top Heavy, there is an alternative way available for highly compensated individuals to defer the IRS maximum into the plan for each plan year. This alternative way to satisfy the ADP test is to qualify the plan as a "safe harbor 401(k) plan." In order to qualify, the 401(k) plan must have Safe Harbor language in their document (or be amended to add this language for $100), satisfy a contribution requirement and a notice requirement. Once you satisfy the requirements to qualify as a safe harbor plan, your plan will no longer be required to satisfy the ADP test and highly compensated employees can defer up to the IRS maximum each plan year (assuming this plus employer contributions doesn't exceed the maximum of 100% of pay) regardless of how much the non-highly compensated defer.
The safe harbor contribution requirement is satisfied if the Employer makes one of the following contributions to the plan:
- An employer 100% vested contribution of 3% of compensation to all employees eligible to participate in the plan
- An employer 100% vested matching contribution for nonhighly compensated employees of up to the first 3% of compensation contributed by the employee and 50% employer matching for employee contributions from 3% to 5% of compensation.
Effective January 1, 2002, the law provides that both the 3% of compensation safe harbor contribution and the safe harbor match described above will also satisfy the minimum 3% contribution if your plan is top heavy (though unlike the 3% top heavy contribution, the safe harbor contribution is 100% vested).
The safe harbor notice requirement is satisfied if each employee who is eligible for the plan is notified in writing of his/her rights under the plan within a reasonable period of time (30 to90 days is recommended) prior to the beginning of each plan year. This notice may be a simple one page notice indicating the plan sponsor has chosen to make a safe harbor matching contribution for the upcoming year, which is then attached to the Summary Plan Description for the Plan. Click here to get a sample notice: Safe Harbor Employee Notice. For more information contact our office.