The ERISA consultants at the Learning Center Resource Desk, which is available through Columbia Threadneedle Investments, regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. A recent call with a financial advisor in California is representative of a common question related to safe harbor plan designs. The advisor asked:
“Is there more than one 401(k) safe harbor plan design and, if so, what are they?”
Highlights of Discussion
- Yes; the three types of safe harbor plan designs that, when adopted, allow the plan sponsor to automatically satisfy nondiscrimination testing include the standard safe harbor plan design, qualified automatic contribution arrangements (QACAs) and the newest one, the DB/(k).
- Standard safe harbor: With this plan, eligible employees can choose to participate by deferring a portion of the pay into the plan. The plan sponsor must give either a matching contribution to those participants who defer a portion of their pay into the plan or a nonelective contribution to eligible employees — regardless of whether they defer a portion of their pay or not.
- QACA safe harbor: A QACA is a type of automatic enrollment plan design that requires eligible employees to begin deferring at least 3% of their pay into the plan and to annually increase their deferral percentage over the next three years to a maximum of 6%. Additionally, the plan requires plan sponsors to give either a matching or nonelective contribution.
- DB/(k) safe harbor: The DB/(k), first available in 2010, is a combination defined benefit (DB) and 401(k) plan with an automatic enrollment feature. On the DB side, there is a mandatory employer contribution for eligible employees. On the 401(k) side, employees must defer a portion of their pay into the plan and the employer must give either a matching or nonelective contribution.
- All three safe harbor plan designs require the adopting employer to satisfy certain requirements related to participant notices, elections, vesting (which pertain to when participants have a nonforfeitable right to their employer contributions) and distribution restrictions.
Conclusion
Nondiscrimination testing for 401(k) plans (i.e., the actual deferral percentage (ADP), actual contribution percentage (ACP) and top-heavy tests) can be quite complicated, and if your plan fails any of these tests, you must take corrective measures or face potential plan disqualification from the IRS. One way for a plan to automatically satisfy the nondiscrimination testing rules is by adopting one of three safe harbor plan designs.
The Learning Center Resource Desk is staffed by the Retirement Learning Center, LLC (RLC), a third-party industry consultant that is not affiliated with Columbia Threadneedle. Any information provided is for informational purposes only. It cannot be used for the purposes of avoiding penalties and taxes. Columbia Threadneedle does not provide tax or legal advice. Consumers consult with their tax advisor or attorney regarding their specific situation.
Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by Columbia Threadneedle.
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