Safe Harbor 401(k) Plans
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The Safe Harbor 401(k)
Plan is ideal for employers who wish to eliminate the burden of the
discrimination testing associated with the traditional 401(k) plan. This type of
plan allows all employees to contribute up to the maximum yearly deferral
($15,500 for 2007 plus an extra $5,000 if you are age 50 or older) as long as
certain “safe harbor” conditions are satisfied.
Eliminating the Average Deferral Percentage
(ADP) Test:
The ADP test requirements are met if the plan satisfies either of the following two conditions:
- A matching contribution is made which equals at least 100% of the first 3%
of compensation deferred and at least 50% of the next 2% of compensation
deferred. A modified formula is permitted, so long as the total amount of
the match is not less than what the statutory formula would produce, and the
rate of match does not increase as the rate of deferral increases. For
example, a formula of 100% on the first 4% of compensation deferred would
satisfy the requirements. Only employees who contribute to the 401(k) plan
receive a matching contribution.
- A non-elective contribution of not less than 3% of compensation is made by
the employer to all eligible employees, regardless of whether they defer
under the 401(k) arrangement. The 3% contribution must be set by the plan
document and may provide that this contribution be made to only Non-Highly
Compensated Employees. The document may allow the employer the discretion to
contribute more. Also, the non-elective contribution may be made to a
separate defined contribution plan. (The employer may elect to provide
additional contributions subject to vesting. For example, if the 3%
non-elective contribution is chosen, that portion must be 100% vested. A
discretionary matching contribution may also be made which is subject to
vesting.)
To eliminate the ADP tests, all Safe Harbor contributions must be
100% vested when contributed.
The plan cannot have a last day or 1000 hours requirement on the Safe Harbor matching or non-elective contribution.
 |
EXAMPLE: |
|
Age |
Compensation |
EE Deferral |
Profit Sharing
3% Non-Elective |
Total |
Key EE |
50 |
$225,000 |
$20,500 |
$
6,750 |
$27,250 |
Spouse |
50 |
40,000 |
20,500 |
1,200 |
21,700 |
Employee 1 |
28 |
30,000 |
12,000 |
900 |
12,900 |
Employee 2 |
32 |
40,000 |
_____ |
1,200 |
1,200 |
TOTALS |
|
$ 335,000 |
$ 53,000 |
$ 10,500 |
$ 63,050 |
Dealing with the Actual Contribution
Percentage (ACP) Test:
A
Safe-Harbor plan can also automatically pass the ACP test if it meets four
rules:
-
The allocation of any discretionary matching
contribution cannot exceed 4% of compensation.
-
Deferrals in excess of 6% of compensation may
not be matched.
-
The rate of match cannot increase as deferral
percentage increases.
-
There can be no allocation conditions placed on
the match, i.e., It cannot have a last day or hours requirement.
Final 401(k) Regulations recently passed have more
clearly defined the ACP Safe Harbor. If a plan does not satisfy the four
requirements above, additional matching contributions will be subject to the ACP
test.
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