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Safe Harbor 401(k) Plan


Maintaining a 401(k) plan may at times be extremely burdensome on a small business owner, especially when performing annual testing to ensure compliance with current IRS regulations. To reduce or eliminate these testing requirements, a plan sponsor may consider adopting a Safe Harbor 401(k) plan. If certain conditions are met, this type of plan does not require the Actual Deferral Percentage, or ADP, and the Actual Contribution Percentage, or ACP, tests to be performed.

In order to meet the Safe Harbor requirements, a small business owner must elect to make one of several allowable matching contributions. Perhaps the most popular is to make a Qualified Non-Elective Contribution, or QNEC, of at least 3% of compensation to all eligible Non-Highly Compensated Employees. Should this not be feasible, the Safe Harbor match requirements also allow for a match contribution in place of the former. The 401(k) plan will not be required to perform the ADP test if either the QNEC or matching contribution is made. Additional requirements apply in order to avoid being held accountable for ACP testing.

From the standpoint of a small business owner, these types of contributions may be slightly greater than what would otherwise be allocated to plan participants, resulting in a higher up-front cost. The additional expense of a Safe Harbor 401(k) plan may be well worth it, considering that the cost and administrative burden of annual testing is greatly reduced. In addition, knowing that the plan is automatically considered to be in compliance with the Internal Revenue Code's contribution and deferral requirements provides invaluable peace of mind. Finally, the increased match may in fact be a boon to a small employer, as the funds are being passed along to employees via their retirement accounts, helping to attract top workers.

When considering adopting a Safe Harbor 401(k) plan, there are several additional requirements to understand. Safe Harbor contributions made on behalf of employees must always be fully vested. In other words, they may not be returned to the employer upon termination of employment. This requirement will have minimal impact on a small business owner, and may even reduce the administrative burden of maintaining a vesting schedule. An annual notice must also be supplied to participants explaining the provisions of the plan. Again, for the peace of mind the Safe Harbor provides, this requirement may be of little consequence. Additionally, the use of Safe Harbor provisions must be specified in the plan document, so any changes will require a plan amendment. This could be problematic if small business owners find themselves short on funds for a given year, as Plan Amendments can be costly and time consuming. Finally, withdrawal requirements apply to the Participants, but this is once again of little impact to the business owner themselves.

Overall, the choice to move to a Safe Harbor Plan design will ultimately be in the hands of the business owner. Providing peace of mind and administrative ease, this type of plan may be useful for a company with steady, reliable revenue, that's willing to pay slightly more for a user-friendly plan design that is of the most benefit to their employees.

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