A Safe Harbor for your 401k

Department of Labor and IRS non discrimination rules sometimes can make establishing a
401k hard for small businesses with a few highly compensated employees.  Owners and
highly compensated employees are usually limited in their salary deferrals by the
participation rate and average deferral rate of all employees.

If your 401k plan has or expects to have low participation rates or employee deferral rates,
including safe harbor provisions in your plan may be the solution you need.

To qualify for the safe harbor provisions the plan must make contributions to employee
accounts by one of the following methods:

Make a 3% Non elective contribution

  • No allocation requirements may be imposed ie. minimum hours of service or employed
    on last day of plan year .  Must cover all employees, even those who died or
    discontinued service during the plan year.
  • Must be 100% vested immediately.  However these funds are not available for in-
    service withdrawals, even under the hardship withdrawal rules.

Make matching contributions of 100% of the first 3% of salary deferral and 50% of
next 2% of salary deferrals

  • No allocation requirements may be imposed ie. minimum hours of service or employed
    on last day of plan year.  Must cover all employees, even those who died or
    discontinued service during the plan year.
  • Must be 100% vested immediately.  However these funds are not available for in-
    service withdrawals, even under the hardship withdrawal rules.
  • Rate of match cannot increase as deferral rate increases.

A safe harbor notice must be provided to each eligible employee 30 to 90 days before the
start of each plan year.  

A safe harbor provision cannot be added to an existing 401k plan during the plan year.  The
plan may be amended to include a safe harbor provision but it cannot become effective until
the first day of a new plan year.  A newly established 401k must have at least three months
remaining in the short plan year to have a safe harbor provision, unless it is a plan for a
brand new business.

Oak Street Advisors
1335 44t Ave N.  Suite 203
Myrtle Beach, SC  29577
843.946.9868

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"Understanding Retirement Plan Fees
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