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SAFE HARBOR PLAN DESIGN EXPLANATIONS

The four safe harbor plan design options are categorized as:

Traditional – Participants must enroll in the 401(k) feature (as in make the decision to defer into the plan)
  • Category 1 - Safe Harbor Non Elective Contribution
  • Category 2 - Safe Harbor Company Match Contribution
Automatic Enrollment – Participants are automatically enrolled in the 401(k) feature
  • Category 3 - Safe Harbor Automatic Enrollment Company Match
  • Category 4 - Safe Harbor Automatic Enrollment Non Elective Contribution

The key difference between the safe harbor automatic enrollment and the traditional safe harbor options are:

  • The automatic enrollment feature allows for a 2 year cliff vesting schedule as compared to 100% vesting for the traditional safe harbor
  • Automatic Enrollment enrolls each eligible participant until they make a deferral election (not to participate or other), whereas the traditional safe harbor option requires participants to formally enroll.
  • Automatic Enrollment may involve more work in the payroll department if the initial automatic enrollment salary deferral rate is below 6%.

Safe harbor plans require an annual notice to each employee participant that includes specifics related to the plan design, such as eligibility, vesting and the company contribution calculation. We generate these notices for our clients each year on or around November 1st as they must be provided to all eligible participants 30 days before the start of the plan year.

 

Category 1: Traditional - Safe Harbor Non-Elective Contribution

A 3 percent non-elective contribution to all eligible employees, the contribution is 100 percent vested. Contribution is required for each eligible employee regardless if they contribute to the plan or not.

Compensation for the calculation can be from the point of entry or for the entire plan year. If the plan sponsor elects from the point of entry and the plan is considered top heavy, then the plan will have to make an additional top heavy contribution to these participants as the top heavy contribution requires plan year compensation.

This plan design is often used for plans that have recently made a top heavy contribution or those that leverage a cross tested feature as the 3% NEC counts to the minimum gateway calculation.

Plans can prefund this contribution throughout the year, as long as all eligible participants are receiving the prefunding and the plan makes a ‘top up contribution’ at the end of the Plan year.

 

Category 2: Traditional Safe Harbor Matching Contribution

A 100 percent company match on the first 3 percent deferred and 50 percent on the next 2 percent deferred, the contribution is 100 percent vested. The safe harbor match contribution is required for each eligible employee that contributes to the plan.

The plan sponsor can calculate the company match by payroll, quarter end, or at year end. If the Plan decides to perform the company match by payroll or quarter end, the contribution is due to the trust by the end of the following quarter. The payroll company typically calculates this match.

Plans that select to calculate the company match at the end of the year must deposit the contribution by the company’s corporate filing date, including extensions. The TPA or the ERISA Consultant typically calculates year-end matches.

 

Category 3: Automatic Enrollment Safe Harbor Matching Contribution

A match of 100 percent of the first 1 percent deferred plus 50 percent of the next 5 percent deferred. As discussed in the beginning of this section, these monies can be attributed to a 2 year cliff vesting schedule.

The plan sponsor can calculate the company match by payroll, quarter end, or at year end. If the Plan decides to perform the company match by payroll or quarter end, the contribution is due to the trust by the end of the following quarter. The payroll company typically calculates this match.

Plans that select to calculate the company match at the end of the year must deposit the contribution by the company’s corporate filing date, including extensions. The TPA or the ERISA Consultant typically calculates year-end matches.

 

Category 4: Automatic Enrollment Non-Elective Contribution

Offer a 3 percent non-elective contribution to all eligible employees. As discussed in the beginning of this section, these monies can be attributed to a 2 year cliff vesting schedule.

 

Automatic Enrollment Notes/FAQ

We have a lengthy FAQ document that we can provide under separate cover if you need more information. We have provided the most answers to the most popular questions below:

 

How is the initial salary deferral rate elected?

The starting salary deferral rate must be between 3 – 10%. For plans with an automatic enrollment election of less than 6%, the participant is subject to a 1% salary deferral increase on December 31st of each plan year until they reach 6% OR until the eligible participant makes a deferral election (not to participate or other). The stated percentage must be applied uniformly to all eligible employees.

For plan sponsors setting the rate below 6%, once the participant makes an affirmative election for their salary deferral percentage, they are set (no more automatic increases should occur). Many plans that elect the automatic enrollment safe harbor feature start the salary deferral at 6%, thus avoiding an annual payroll department task to increase the salary deferral rates for some participants.

 

Where are the monies invested?

The plan sponsor must elect a Qualified Default Investment Alternative (QDIA) and all default monies will be deposited in the QDIA.

The PPA of 2006 goal for the QDIA is that it meets a worker’s long-term retirement savings needs, rather than just preserving capital. The final regulations provide four QDIA investment alternative mechanisms, rather than specific products. An example of a product for each category is provided.

  • A product with a mix of investments that takes into account the individual’s age, retirement date, or life expectancy (for example, a life-cycle or targeted-retirement-date fund);
  • A product with a mix of investments that takes into account the characteristics of the group of employees as a whole, rather than each individual (for example, a balanced fund);
  • An investment service that allocates contributions among existing plan options to provide an asset mix that takes into account the individual’s age or retirement date (for example, a professionally-managed account); and
  • A capital preservation product for only the first 120 days of participation. This eases administration, for example, in the case of workers that opt-out of participation within 90 days. After 120 days, the plan fiduciary must redirect the participant’s investment into the above three QDIA categories (unless the participant opted-out of the plan or redirected investments during the 90 days).

 

If a participant comes back to the plan sponsor right away after the automatic enrollment salary deferral, can they get it back?

Yes, a participant must request the distribution within 90 days of the date the first amounts were withheld from pay under the default deferral election. These are called ‘do-over’ distributions. This is a 1099R event.

No partial distributions are allowed and any attributable match must be forfeited.

 

Are current participants or employees impacted with the default deferral percentage?

All eligible participants who do not currently have an affirmative deferral election in effect are subject to the automatic contribution arrangement.

 

The content of this website is general in nature and is for informational purposes only. It should not be used as a substitute for specific tax, legal and/or financial advice that considers all relevant facts and circumstances.

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