Each Monday 401kBasics posts a new tip as a part of our series “Plan Sponsor Quick Tips”. This series is designed to assist plan sponsors in filling their fiduciary role and running their retirement plan efficiently. Your feedback or suggestions on future articles is welcome.
There are two types of safe harbor 401k plans that alleviate the need for nondiscrimination and in some cases top heavy testing by providing participants with an immediately vested, mandatory employer contribution. Any size business can offer a safe harbor plan with the key features and benefits as follows:
- They encourage higher salary deferral rates of the participants without the required annual nondiscrimination testing. (This is contingent on the employer meeting all requirements per plan document.)
- They allow highly compensated employees (HCEs) to maximize their contributions.
- The safe harbor match is a 100% match up to 3% of salary deferral, plus an additional 50% match on the next two percent.
- The safe harbor nonelective is a 3% match to all eligible participants.
- The maximum combined employer and employee contributions are the lesser of 100% of an employee’s compensation or $49,000 [in 2010] or more if eligible for catch-up contributions. (COLA)
- The plan offers more design flexibility.
- Plan may allow loans and in-service withdrawals for hardship or after age 59 1/2.
- Any additional, non-mandatory employer contributions may vest over years of service not to exceed 6 years.
The admininistration expense for these safe harbor plans is usually moderate and this is why many employers have adopted them. State or local government entities, however, may not adopt safe harbor plans. Your plan document will indicate if your plan is a safe harbor or not but when in doubt you may always contact your service provider.
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