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June 30, 2020

Safe Harbor Comparison

Benefits of a Traditional Safe Harbor or QACA Plan Design

Plan sponsors often have questions regarding 401(k) plans, nondiscrimination testing requirements and safe harbor plan designs.  When a 401(k) plan fails nondiscrimination testing, the most common method of correction is to refund excess contributions to owners and highly-paid employees, resulting in a reduction of their retirement savings.  In order to avoid this consequence, a 401(k) plan can be designed to include a safe harbor contribution, which eliminates many of those testing requirements.  The following is a basic comparison of the two plan designs.

Traditional Safe Harbor Contribution

Safe harbor 401(k) plans require an employer to make either a nonelective or matching contribution to participants.

  • Safe harbor nonelective contribution: The contribution is equal to 3% (or more) of compensation, regardless of whether the employee defers their own compensation to the plan.  This contribution must be made on behalf of all employees who attain age 21 and have earned 1 year of service (a 12-month period in which the employee worked at least 1,000 hours).
  • Safe harbor matching contribution:  There are two options:
    • Basic match equal to 100% of the first 3% of compensation a participant contributes, plus 50% of the participant’s contributions between 3% and 5% of their compensation. 
    • Enhanced match at least as generous as the basic match at each tier of the formula.  A typical formula is a match of 100% of the first 4% of compensation a participant contributes.

Traditional safe harbor contributions must be 100% vested at the time they are contributed to the plan.  Eligibility conditions for receiving the safe harbor contributions can be less restrictive than those described above but cannot be more restrictive.  No other conditions, such as working a certain number of hours during a plan year or being employed on the last day of a plan year, can be applied to the safe harbor contribution.

Qualified Automatic Contribution Arrangement (QACA)

Another type of safe harbor contribution includes automatic enrollment and must meet additional requirements in order to qualify.

  • The employer must make one of two safe harbor contributions:
    • QACA match: The contribution is equal to 100% of the first 1% of compensation the participant contributes, plus 50% of the participant’s contribution between 1% and 6% of their compensation.
    • QACA nonelective: The contribution is equal to 3% (or more) of compensation, regardless of whether the employee defers their own compensation to the plan.  This contribution must be made on behalf of all employees who attain age 21 and have earned 1 year of service (a 12-month period in which the employee worked at least 1,000 hours).
  • Employees must be automatically enrolled in the 401(k) plan subject to the certain limits:
    • A participant must be automatically enrolled for at least 3% of compensation in their first year of participation, and the deferral rate must automatically increase by 1% annually until the participant’s deferral rate reaches at least 6% of compensation.
    • An employer can elect to continue to automatically increase beyond 6% of compensation, but cannot increase any higher than 15% of compensation.

QACA contributions can be subject to a vesting schedule but must be 100% vested after earning 2 years of service (a 12-month period in which the employee works at least 1,000 hours).  Eligibility conditions for receiving the safe harbor contributions can be less restrictive than those described above but cannot be more restrictive.  No other conditions, such as working a certain number of hours during a plan year or being employed on the last day of a plan year, can be applied to the safe harbor contribution.

Conclusion

A safe harbor plan design can be a great option for an employer to offer competitive, cost-effective retirement benefits.  However, there are a number of other plan design decisions that need to be made when a safe harbor contribution is incorporated in a 401(k) plan, such as the timing of the change, required participant disclosures, whether other contribution types will be made to the plan, and how automatically enrolled participants will have their contributions invested.  An experienced consultant can assist in reviewing all of these issues and answering your questions regarding safe harbor contribution options.

More Information

For more information on Safe Harbor Comparisons or additional resources please contact CBIZ Retirement Plan Services.

 

CBIZ Retirement Plan Services is a trade name under which certain subsidiaries of CBIZ, Inc. (NYSE Listed: CBZ) market investment advisory, investment management, third party administration, actuarial and other retirement plan services. Investment advisory and investment management services offered through CBIZ Investment Advisory Services, LLC, SEC Registered Investment Adviser.  Investments, investment advisory and investment management services may also be offered through CBIZ Financial Solutions, Inc., Member FINRA, SIPC and SEC Registered Investment Adviser, dba CBIZ Retirement Plan Advisory Services.  Third party administration, actuarial and other consulting services offered through CBIZ Benefits & Insurance Services, Inc.

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