By Yariel Chiong and Tobi Cogswell
One of the most popular plans for small business owners with employees is the Safe Harbor 401(k) Plan.
Would Safe Harbor help you?
■ Does your Plan fail discrimination tests?
■ Is your Plan top-heavy?
■ Are you seeking to maximize deferrals and profit sharing allocations for highly compensated employees?
■ Is your company making significant matching contributions to a 401(k) plan to accommodate deferrals made by highly compensated employees?
If you answered “yes” to any of these questions, you might want to consider a safe harbor plan design. An existing 401(k) plan cannot become safe harbor until the first day of the next plan year (usually that will be January 1, 2012) but profit sharing plans that have never had 401(k) provisions can add safe harbor provisions for 2011. There is some urgency here because this must be inplemented by October 1st.. .
What is Safe Harbor?
401(k) plans that take advantage of “Safe Harbor” contributions avoid ADP and ACP testing. In practical terms, this means that highly compensated employees may defer the maximum allowable amount of compensation into the plan ($16,500 in 2011 plus a $5,500 catch up for anyone 50 or older) without worrying about deferral refunds due to failed ADP tests.
Plan sponsors have two contribution options: First, sponsors may make a 3% profit sharing contribution to every nonhighly compensated employee; or they may provide a minimum matching contribution of 100% of the first 3% of compensation deferred, plus 50% of the next 2% of compensation deferred to all deferring employees. ACI can help you decide which is right for you.
Disadvantages of Safe Harbor
The drawbacks for some employers are the size of the safe harbor contribution, the immediate vesting and no last-day requirements associated with the plan contribution. There is also a notice requirement to the participants.
The Reward of a Safe Harbor 401(k) Plan
This contribution makes non-discrimination testing a thing of the past. As long as the employer faithfully makes the promised contribution, the plan is deemed non-discriminatory. A safe harbor profit sharing contribution also satisfies top heavy, and the first 3% “gateway” if you have a cross-tested profit sharing allocation. It’s a beautiful thing.
Contact ACI to learn more about starting a Safe Harbor Plan.
Tobi Cogswell
Tobi.Cogswell@acibenefits.com
310 212-2623
We’ve made the Los Angeles Business Journal’s list again of the Top 20 largest firms in L.A. County handling employee benefits. In this complex economy ACI continues to stand its ground never stepping down from a fight. We couldn’t have done it without putting the client first. Our deep understanding of the retirement industry helps us provide simplified administration and a comprehensive approach to managing your company’s retirement plan. We help bring efficiency to the process by providing vertical case management, consolidating all your plans administrative needs under one case manager. Navigating through new legislative updates and requirements can be daunting but it doesn’t have to be. We do this so you can focus on what’s most important: helping your employees retire. 
