Employers that offer 401(k) plans must ensure that they do not discriminate in favor of owners, officers or highly compensated employees. In order to retain their tax-qualified status, companies must verify compliance with several annual tests, including coverage tests, ADP/ACP tests, top-heavy tests and contribution/deduction limit tests.
Safe harbor 401(k)s are a type of plan that avoids most annual compliance tests, as well as the fees and time it takes to complete these tests. For employees, safe harbor plans also ensure that everyone – including highly compensated employees – can make maximum contributions and 100% of all contributions are immediately vested.
Typically, there are three types of safe harbor 401(k) plans:
- Non-Elective: Eligible employees receive an annual employer contribution of three percent of their salaries that is immediately 100% vested. The employee receives the employer contribution regardless of whether or not they contribute to the plan.
- Basic Match: Employers match 100% of the first three percent of each employee’s contribution and half of the next two percent. Employees are required to contribute to their 401(k) plans in order to qualify for the match.
- Enhanced Match: Employers match 100% of the first four percent of each employee’s contribution. Employees are required to contribute to their 401(k) plans in order to qualify for the match.
The Setting Every Community Up for Retirement Enhancement Act, commonly known as the SECURE Act, eliminated the notice requirement for non-elective safe harbor plans, and employers are allowed to switch to a safe harbor 401(k) plan with non-elective contributions prior to 30 days before the end of the plan year.
To learn more on how the SECURE Act could affect your retirement planning, check out this article.