The 401k Easy Doc "Safe Harbor" Plan Option

The IRS offers an alternative means for achieving 401k plan balance: The safe harbor method that is included in the 401k Easy Docs prototype plan package lets 401k plans skip their annual 401k discrimination testing. The sponsoring employer meets certain employer 401k contribution requirements that are designed to ensure broad participation in the company plan; the employer, too, must provide 100% immediate vesting of the contributions.

To qualify for the 401k Easy Doc safe harbor option, an employer must make “matching” contributions that fulfill the below requirements, or make "non-elective" contributions equal to 3% of each eligible employee's compensation.

If the employer chooses to make safe harbor “matching” contributions, those contributions must meet two requirements: First, each non-highly-compensated employee must receive a dollar-for-dollar match on salary deferrals up to 3% of compensation and a 50¢ to the dollar match on salary deferrals from 3% to 5% of compensation. Second, the rate of any matching contributions being made to highly compensated employees cannot exceed that being made to non-highly compensated employees.

For employers who want a safe harbor plan that uses “non-elective” contributions, these contributions are made to all eligible employees, regardless of if the employees participates in the company’s 401k plan or not. This makes them different than the matching contributions described above, which are based upon participants’ salary deferral amounts, and made only to active 401k participants' accounts.

In all safe-harbor plans the employer must provide annual information to employees explaining the 401k plan's safe harbor provisions and benefits, including commentary that that safe harbor contributions cannot be distributed before termination of employment and that they are not eligible for financial hardship withdrawal.

Your 401k Easy Docs system includes all necessary notifications within your customized 401k Summary Plan Description, a document for prospective and active plan participants that's updated on a regular basis as part of the 401k Easy Doc package.