NOVEMBER 2007 Pension Plan tip of the month...
The 2008 calendar year is fast approaching. NOW may be the right time to start thinking about a safe harbor 401(k) plan for your company for 2009. If ADP/ACP and/or top heavy test failures are concerns of your Plan, there are 3 safe harbor options that may help you in meeting the needs of your participants.
This option requires a 3% contribution to all eligible employees based on their full year of eligible compensation. The employer contribution is 100% vested.
There are 2 types of safe harbor match options. The first is a basic match, which is 100% of the first 3% and 50% of the next 2% of employee deferrals. The enhanced match is any formula more generous than the basic match with certain limitations. The employer matching contribution is 100% vested.
Safe Harbor Automatic Enrollment
This option requires minimum automatic deferrals. The arrangement must provide that the automatic withdrawals will be at least 3% of pay for the first year, 4% for the second year, 5% for the third year and 6% thereafter – unless the participant affirmatively elects a different contribution rate or elects not to contribute at all. The automatic contribution rate cannot exceed 10% of pay.
The employer must either make matching contributions or profit sharing contributions at a minimum rate:
*Matching contributions of at least 100% of the first 1% of compensation deferred plus 50% of the next 5% of compensation deferred or
*A profit sharing contribution of 3% of compensation
The employer contribution is 100% vested after 2 years, 0% after the first year and 100% after the second year.
If no investment option is selected by the participant, their contributions will be invested in a Qualified Default Investment Alternative (QDIA).
Notices must be provided and must include required information including the right to opt out of the arrangement or change their contribution rate. Notices must be given within a reasonable period of time before the participant is automatically enrolled.
The Safe Harbor Non Elective, Safe Harbor Match and Safe Harbor Automatic Enrollment plans allow for exemption from the ADP test. They would also be exempt from the ACP test and top heavy testing if no additional employer allocations are made.
Safe Harbor Plans require immediate vesting, no allocation requirements (such as last day and 1000 hours rules) and are not available for in service prior to age 591/2 or hardship distributions.
Annual notice must be provided to each eligible employee between 30 to 90 days prior to the start of the plan year. Employees who are newly eligible during the plan year require notice prior to their entry date.
Existing 401(k) plans can add the safe harbor feature to their plans prior to the start of the upcoming plan year. An existing profit sharing plan can add a Safe Harbor 401(k) if there is at least 3 months remaining in a plan year.