Monday, November 28, 2016

6 Questions Plan Sponsors Should Ask About Safe Harbor Plans

1. What are safe harbor plans?

Safe harbor plans are retirement plans that generally satisfy the non-discrimination rules for elective deferrals and employer matching contributions and therefore are appealing to organizations that are at risk of failing the ADP and ACP tests (see below). Safe harbor plans can be offered with the same flexible features as traditional retirement plans, including eligibility, participant loans, and distributions. However, employers must satisfy certain contribution, vesting, and notice requirements and employers may not apply allocation conditions to safe harbor contributions (e.g., last day of employment requirement, 1,000 hours in the year requirement, etc.).

2. What is non-discrimination testing?

Generally, the U.S. Government wants to ensure that plans do not favor highly compensated
employees (HCEs) over non-highly compensated employees (NHCEs). The government established required compliance tests to verify all employees have fair representation in a plan. There are generally three main types of compliance tests required to be performed on a retirement plan to ensure a plan does not treat employees unfairly:
  • Actual Deferral Percentage (ADP) test—compares the deferral percentage of HCEs and NHCEs. (Generally, the HCE deferral amount cannot be more than two percentage points higher than the non-HCEs’ average.) As a reminder, 403(b) plans are not subject to ADP testing. 
  • Actual Contribution Percentage (ACP) test—compares employer matching contributions between the HCEs and NHCEs.
  • Top-Heavy test—determines if the account balances of key employees are greater than 60% of the total assets of the plan.

3. What is the contribution requirement a plan sponsor must satisfy?

Once a safe harbor plan design is adopted, employer contributions are not discretionary and organizations that choose a safe harbor plan must commit to one of the following contribution options. Therefore, safe harbor plans work particularly well for organizations that have consistent streams of revenue.
  • A non-elective contribution to all eligible participants: 
    • Contribute at least 3% of the employee’s compensation for each eligible employee, regardless of whether the employee chooses to participate in the plan. (As long as the 3% requirement is satisfied, the plan may provide additional non-safe harbor contributions at the employer’s discretion.) 
  • A matching contribution under one of the following formulas: 

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If you have any questions, or would like to begin talking to a retirement plan advisor about whether a safe harbor design would be advisable for your plan, please get in touch by email or by calling (855) 882-9177.