401(K) Safe Harbor Plans

Generally stated, safe harbor 401(k) plans are similar to traditional 401(k) plans, but are structured in a way that some of the otherwise applicable annual nondiscrimination tests can be avoided. Legally speaking, a safe harbor 401(k) plan is otherwise identical to a traditional 401(k) plan, except that it must meet specific additional requirements under the Internal Revenue Code, such as:

• Employer safe harbor contributions (either matching contributions and/or non-elective contributions), which must be fully, 100% vested when made.
  • Employer matching contributions are received only by employees who choose to make elective deferral contributions, whereas employer non-elective contributions (for example, profit-sharing contributions) are generally made on behalf of all eligible employees, regardless of whether the employees choose to make elective deferral contributions.
  • For most safe harbor plans (see exception noted below), an annual Safe Harbor Notice must be provided to all employees eligible to participate in the plan within strict timeframes (for most employees, at least 30 days and not longer than 90 days before the beginning of the plan year).

The main benefit to the employer of providing a safe harbor 401(k) plan is that, assuming all requirements are met (including the annual notice requirement, if applicable), participant elective deferrals and any safe harbor employer contributions are not subject to certain of the complex annual nondiscrimination tests that apply to traditional 401(k) plans such as ADP/ACP Testing and Top-Heavy Testing.

Special Notice Requirements Applicable to Restrictions on Mid-Year Amendments

The purpose of the regular safe harbor notice described here is to generally describe to eligible employees the terms of the plan, including the safe harbor contributions that will be provided, for the upcoming plan year. In order to ensure that those plan terms continue for the entire plan year, the IRS does not generally permit safe harbor plan terms to be amended mid-year, unless the mid-year changes are expressly permitted under IRS guidance.

A plan sponsor should always consult with legal counsel to determine if a desired mid-year plan amendment is permitted under a safe harbor plan. The following is a partial list of some of the more common exceptions with respect to mid-year amendments which are permitted under IRS guidance:

• Expanding coverage to include employees who were not previously eligible to be included (so long as existing participants are not affected);
• Adding a Roth elective deferral feature;
• Changing the provider of plan investment funds (for example, from Fidelity to Vanguard);
• Changing the plan trustee;
• Increasing future safe harbor nonelective contributions from the statutory minimum of 3% to 4% for all eligible employees; and
• Adding an age 59 ½ in-service withdrawal feature.

If the mid-year change affects the information that was previously provided in the plan’s annual required safe harbor notice, the plan sponsor generally must:

• Provide an updated safe harbor notice that describes the mid-year change and its effective date, within a reasonable period before the effective date of the change, to each employee that must otherwise receive a safe harbor notice.
  • Providing the notice 30-90 days before the effective date is generally deemed reasonable; and
• Give each notified employee a reasonable period of time to change his or her cash or deferral election (1) after receipt of the notice, and (2) before the effective date of the change.
  • A 30-day election period fitting within those parameters is generally deemed to be reasonable for this purpose.

The safe harbor notice may be delivered electronically. The requirements for electronic delivery are set forth in Treas. Reg. § 1.401(a)-21. Additional information is also available in the reference material.

One optional variation on the non-elective contribution safe harbor is the “wait-and-see” approach (see here under “Non-elective Contribution Safe Harbor”). Under this alternative, the employer typically waits until close to the end of the plan year, when it can run preliminary nondiscrimination tests for the plan year, to decide whether it would be beneficial to amend the plan to provide the 3% safe harbor non-elective contribution for that year (i.e., whether the plan might be expected to fail one or more of the tests unless it were amended to be a safe harbor plan).

• If the employer decides to make the plan a safe harbor plan for that year by making the 3% safe harbor non-elective contribution, then the employer must:
  • Amend the plan to include the appropriate safe harbor plan provision, and
  • Provide an additional notice to employees by no later than 30 days before the end of the plan year.
• If the employer decides not to make the plan a safe harbor plan for that year, no further action is necessary.

Safe Harbor Arrangements Exempt From Annual Notice Requirement

Effective on and after January 1, 2020, the regular annual notice requirement mentioned previously and described here no longer applies to safe harbor plans providing a safe harbor non-elective contribution equal to at least 3% of participant compensation.