Upcoming Deadline: What Are Safe Harbor Retirement Plans?

When designing retirement plans, small and medium-sized businesses often have the option to implement a safe harbor plan. Safe harbor 401(k) plans provide a way for businesses to reward their employees while also saving themselves administrative hassles.  

What is a safe harbor 401(k)?

A safe harbor 401(k) plan guarantees that every eligible participant receives an employer contribution while also benefiting the employers themselves. By providing a fixed employer contribution, this type of plan allows employers to bypass key IRS's 401(k) nondiscrimination tests, ensuring fairness and equity for all employees. 

There are three types of safe harbor 401(k) plans. To be considered a legal safe harbor plan, you must have one of the following in your plan: 

1. 1. Basic match: The company will match 100% on the first 3% of deferred compensation and a 50%      match on the next 2% of deferred compensation.

1. 2. Enhanced match: A company match that is equally or more generous than the basic match at        each tier of the match formula. For example, one common formula is 100% match on the first          4%. 

1. 3. Nonelective: The company contributes 3% or more of each employee’s compensation,                      regardless of whether the employee elects to contribute themselves. 

In addition, to be a safe harbor plan, the employer contribution must be immediately 100% vested, unless you are using a qualified automatic contribution arrangement (QACA) formula. More on that below. 

What is a QACA? 

Safe harbor plans may include a QACA provision, which is an automatic contribution arrangement that treats employees who fail to make an election as having elected to defer the default percentage set by the plan. Participants may opt out of the default contribution election at any time. The required employer contribution under a QACA formula may be subject to a vesting schedule of no more than a 2 year cliff but still satisfies the safe harbor arrangement.  

See more about vesting schedules here. 

Don’t wait: safe harbor deadlines

Unlike other retirement plan types, safe harbor plans have strict deadlines for launching. 

The deadline to establish a new safe harbor plan is October 1. (The first year of a new safe harbor 401(k) plan must allow for at least three months of deferral). 

For all safe harbor plan types, it is important for plan sponsors to know the deadlines set by their service providers as well. This includes deadlines for preparing plan documents and plan launch items ahead of the time of the October 1 deadline for plans to be live. 

There are additional deadlines for plans that are no longer in their first year, first year plans that may want to add a safe harbor provision and more. Find those here. 

Who should consider a safe harbor plan? 

There are certain situations where safe harbor plans can be especially advantageous for a company, such as: 

• You have recently failed nondiscrimination or compliance testing. 
• Your company’s highly compensated employees want to contribute more to their 401(k) without the risk of failing nondiscrimination testing. 
• Your plan is top-heavy( more than 60% of the plan assets allocated to key employees). 
• You have low engagement with your current 401(k) offering. 

Safe harbor plans are ideal for employers seeking to actively motivate their employees to save.  With immediate (or near-immediate) vesting and required employer contributions, employees are encouraged to participate throughout their tenure.