Are you contemplating the initial implementation of a 401(k) plan that includes a safe harbor feature for 2015? Do you have an existing profit sharing plan that you would like to add a safe harbor 401(k) feature to in 2015? If the answer is yes to either of these questions it is not too late to do this for 2015 — but you better hustle as time is running out!
Incorporation of a safe harbor feature in a 401(k) plan (or an existing profit sharing plan) helps ensure that the plan's highly compensated employees (“HCEs) — are happy campers when it comes to maximizing their pre-tax contributions under the terms of the 401(k) plan as such a feature allows a plan to automatically pass the 401(k) nondiscrimination test (which often times may be difficult to pass due to a lack of participation by an employer’s non-highly compensated employees). An employer's non-highly compensated employees (“NHCEs”) would also welcome such a safe harbor feature as it allows them to receive employer contributions that are immediately fully vested. In addition, if an employer has historically made discretionary employer profit-sharing contributions to a 401(k) plan, the cost of implementing the safe harbor feature may often be nominal because the employer's contribution can be divided into two components — employer profit-sharing contributions and employer safe harbor contributions — so that the total employer contribution costs remain the same.
A safe harbor employer contribution feature within the 401(k) plan as chosen by the employer can take the form of either a 3 percent of compensation contribution that is made to the plan on behalf of all eligible employees or a stair stepped employer matching contribution that is made to the plan only on behalf of employees that make pre-tax contributions to the plan. The amount of the employer matching contribution is a dollar for dollar match of an employee’s pre-tax employee contributions up to 3 percent of compensation and a 50 cent match on the dollar on pre-tax employee contributions between 3 to 5 percent of compensation (in other words a maximum employer matching contribution of 4 percent of compensation).
If a safe harbor feature is of interest to you in 2015 as to a brand new 401(k) plan (or an existing profit sharing plan that does not already have a 401(k) feature), a “safe harbor notice” MUST be provided to all plan participants of the employer of your intentions before Aug. 31, 2015. Thereafter, the brand new safe harbor 401(k) plan must then actually be adopted by you no later than Oct. 1, 2015 (or as to an existing profit sharing plan the plan must actually be amended to add a 401(k) feature that includes a safe harbor feature no later than Oct. 1, 2015). As to all employers with an existing 401(k) plan that are considering implementing a safe harbor feature please note that the earliest such a feature can be added as to a calendar year plan is Jan. 1, 2016. Stay tuned for my question later next month that ties these issues together.
David Graf is a Partner in the Friday, Eldredge & Clark, LLP law firm in Little Rock. To submit a question, please contact Janet Borders at [email protected].