APRIL 2006 Pension Plan tip of the month...

Since 1999, a popular plan design choice for many employers has been the “Safe Harbor” plan.

This type of plan can help employers and participants maximize their benefit for retirement.  

As an update, we are listing below its main features. A Safe Harbor plan may not be useful to

all employers.  Your plan’s financial advisor or Paragon Account Executive would be happy to

discuss this with you.

Primary Benefits: Satisfies ADP/ACP testing which allows highly compensated employees (HCE)

the ability to defer up to the maximum deferral limit ($15,000 for 2006). The plan would also be

deemed to pass Top Heavy testing if only Safe Harbor employer contributions are allocated.

(HCE’s are defined as 5% owners in current or prior plan year and top 20% of employees earning

greater than $95,000 in prior plan year - 2005).

Effective Date: Plan years beginning after 12/31/98. Feature must be installed before the

beginning of the plan year.

Vesting:  Must be 100% vested.

Contribution Requirement:   

Non-elective employer contribution of at least 3% to all NHCE’s (& HCE’s) eligible for 401(k)

deferrals without regard to whether employee makes elective or employee contributions (similar

to Profit Sharing). The contribution can be used to offset any necessary Top Heavy contribution.

--OR--

Matching employer contribution of at least 100% on elective deferrals up to 3% of compensation

and then a 50% match on elective deferrals from 3% to 5% of compensation.  The contribution

can be used to   offset any necessary Top Heavy contribution.

Restrictions:

• Once eligible, cannot incorporate a provision requiring the employee to be working                                                                                                                                                                                                                                                  on the last day of the plan year or completion of a certain number of hours of service.

• In-service withdrawals are not allowed from the Safe Harbor contribution before age                                                                                                                                                                                                                                            59½, even for hardship. Please note that loans are allowed.

• Employer Match exceeding 6% of pay and after tax contributions still need to be tested.

Notice Rules:

An annual notice is required 30 to 90 days before the beginning of the Plan year.  For a new

Plan, notice can be given up to the first day of the first Plan year for employees eligible as of that date

Exception:  Notice 2000-3 changes the above rule in that it allows a non-safe harbor 401(k)

plan that uses the current year testing method to be amended into a safe harbor plan as late

as 30 days before the end of the plan year.  However, to take advantage of this flexibility, the safe

harbor contribution must be in the form of a 3% non-elective contribution.  In addition, eligible

employees must have received notice before the beginning of the year advising them that the plan

sponsor might choose to amend the plan into a safe harbor plan.  If the plan is ultimately amended

in this way, then notice of the amendment must also be given to participants at least 30 days

before the end of the plan year.

End of Year Matching True-up Rules:  Were removed with IRS Notice 2000-3 released on January 7, 2000