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Commentary

Answers to 401k Plan Operations: Plan Sponsor Issues

401(k) Fact:

The average 401K account balances at the end of 1998 was $47,000 per participant, up 26% from 1996, according to the ICI and the Employee Benefit Research Institute. On average, 78% of eligible employees will participate in a 401(k) plan if one is made available, with the number of participants growing from 19.5 million in 1990 to 53.2 million in 2000. Some of the increase in participation rates is due to the introduction of "negative election," which allows an employer to automatically enroll employees into the 401(k) when they meet the plan's eligibility requirements. The negative election deferral rate and investment(s) must be defined ahead of time, and the employee must be immediately notified of his or her participation status. Target Laboratories (www.targetlab.com) knows from first-hand experience how successful negative elections can be. Automatic enrollment programs are sanctioned by the IRS under ERISA as long as the employee has ample ability to cease enrollment at will.

Q: Can we limit enrollment in our 401(k) plan to employees who have been with the company for at least 18 months?

A: No. One "year of service" is the maximum length-of-service eligibility& requirement that can be applied to a 401(k) plan that includes a cash or deferred arrangement. A year of service is generally defined as a 12-month period beginning on the first day of employment during which an employee has at least 1,000 hours of service. 
  Q: What is a cash or deferred election? -TOP
A: A cash or deferred election is a salary-reduction agreement between employer and employee under which a contribution is made to a plan (in the case of 401(k) plans, a retirement savings plan) conditioned on the employee's request to reduce his or her cash compensation, on a pre-tax basis, by the amount of that contribution. 
  Q: Is there a limit on the amount of contributions that an employee can make to a 401(k) plan? -TOP
A: Actually, there are two limits. Under the first limit, an employee cannot defer more than $7,000 (indexed annually for inflation) to the CODA portion of a 401(k) plan in any one year. Under the second limit, the total of an employee's elective deferrals, after-tax contributions, and nonelective employer and matching contributions generally cannot exceed either $30,000 (indexed annually for inflation) or 25 percent of the employee's compensation in that year, whichever is less. Highly compensated employees (HCEs) also may be limited as a result of nondiscrimination testing under the actual deferral and actual contribution tests.
Q: What kinds of personnel-related information - such as participants' names and Social Security numbers - should a 401(k) plan keep track of? -TOP
A: For purposes of the reporting, disclosure, vesting, testing and other requirements that apply to 401(k) plans, most employers find it necessary to keep track of an employee's date of birth, date of hire, Social Security number, service each year, marital status and any breaks in service.
  Q: Is there an exception to the anti-assignment rules for bankruptcy of the participant? -TOP

A: No. The United States Supreme Court resolved a long-standing question by holding that benefits in a plan subject to Title I of ERISA are not available to pay creditors in a bankruptcy proceeding. [Patterson v Shumate, 112 S Ct 2242 (1992)] 

Under bankruptcy law the estate available for distribution to creditors includes all legal and equitable property interests owned by the debtor. [Bankruptcy Code § 541(a)] There is an exception from this rule for property held in a trust that restricts the transfer of trust property under applicable nonbankruptcy law. [Bankruptcy Code § 541(c)(2)] The Supreme Court ruled that ERISAs anti-alienation provisions constitute applicable nonbankruptcy law. Therefore, a participant's benefits in a qualified plan are not part of the bankruptcy estate and are thus not available to pay claims of creditors. 

Several lower court cases have created exceptions to the Patterson v. Shumate ruling in cases where the only employees covered by a plan are owner-employees. However, these rulings should not have any impact on a 401 (k) plan.


  Q: How do maternity or paternity leaves of absence affect the determination of whether an employee incurs a one-year break in service for purposes of eligibility? -TOP

A: Solely for the purpose of determining whether an employee has incurred a one-year break in service, an employee absent from work on account of a maternity or paternity leave of absence must be credited with up to 500 hours of service. 

The number of hours of service credited during the absence will be the number of hours of service that otherwise would normally have been credited or, if that number cannot be determined, eight hours of service per day. 

The hours will be credited to the computation period in which the absence begins if an employee would be prevented from incurring a one-year break in service: otherwise, they will be credited to the immediately following computation period. 

A maternity or paternity leave of absence is an absence from work as a result of the pregnancy of the employee, the birth of the employee's child, the placement of the employee's adopted child, or the caring for the child after its birth or placement. 

Additional hours are not explicitly required for unpaid leave under the Family and Medical leave Act of 1993 (FMLA). However, the FMLA regulations do state that any period of unpaid FMLA purposes of eligibility to participate in a retirement plan. 

In addition to maternity and paternity leave, FMLA leave can include up to 12 weeks during the course of a serious health condition affecting the employee or a family member.


  Q: What is a year of service? -TOP

A: A year of service means any vesting computation period during which an employee completes the number of hours of service specified in the plan. Not more than 1,000 hours may be specified for this purpose.


  Q: Is a 401(k) plan permitted to disregard any years of service when calculating a participant's vested percentage? -TOP

A: A 401(k) plan may disregard any years of service completed with respect to vesting computation periods ending before a participant's eighteenth birthday. Years of service completed before an employer maintained a 401(k) plan or any predecessor plan may also be disregarded.


  Q: What is the maximum deferral percentage in a 401(k) plan? -TOP

A: If the 401(k) plan will consist only of elective contributions, the maximum deferral percentage is 25 percent. For limitation years beginning before January 1, 1998, the maximum percentage in this case would have been 20 percent. The lower maximum percentage for pre-1998 limitation years reflected the Code's requirement that elective contributions be subtracted from compensation for purposes of applying the annual additions limit. Thus, the 25 percent limitation was applied after reducing compensation by the amount of the elective contribution. 

Example. For the limitation year beginning January 1, 1997, Alfred's annual pay was $40,000. Alfred elects to defer 20 percent of pay into the 401(k) plan, or $8,000 ($40,000 x 20 %). For purposes of computing the Section 415 limit, Alfred's compensation was $40,000 less the $8,000 elective contribution, or $32,000. The maximum annual additions limit was the lesser of 25 percent pay or $30,000. Computing this limit for Alfred yielded a limit $8,000 ($32,000 x 25%).


  Q: What is the maximum annual amount deductible for a 401(k) plan? -TOP

A: In general, the maximum deductible amount for a taxable year of the employer is 15 percent of the compensation paid during the taxable year to the participants under the plan. [IRC § 404 (a) (3) (A) (i)] If an employer maintains two or more profit sharing plans, they will be treated as a single plan for purposes of applying the 15 percent limit. 

Example. Employer XYZ maintains a 401 (k) plan as well as a profit sharing plan covering the same employees. Contributions to the 401 (k) plan amount to 7 percent of participant compensation. If Employer XYZ wishes to contribute the maximum deductible amount, it can make a contribution to the profit sharing plan equal to 8 percent of compensation.


  Q: Is there a limit on the amount of compensation that may be taken into account in determining the maximum deductible amount? -TOP

A: Under Code Section 404(l), the amount of compensation that taken into account with respect to any participant is to $150,000 ($160,000 for taxable years beginning after This limit is adjusted in increments of $10,000, as explain here

In addition, for taxable years beginning before 1997, an HCE who is a 5 percent owner or one of the ten most highly compensated HCEs and his or her spouse and any child who has not reached age 19 before the close of the taxable year will be treated as a single employee for purposes of this limit. This is known as family aggregation. Note that family aggregation has been repealed for tax years beginning after 1996. 

Example. Claire owns 100 percent of ABC Company, which sponsors a 401(k) plan. The compensation of the employees of ABC Company for its taxable year beginning July 1, 1996, is as follows:

Employee Relationship 
to Claire
Compensation Subject to Family Aggregation
Claire $180,000 Yes
Dave Husband 75,000 Yes
Derek Son (over 19) 75,000 No
Danny Son (under 19) 5,000 Yes
Vincent None 100,000 No
N1 None 30,000 No
N2 None 25,000 No
N3 None 24,000 No
N4 None 23,000 No
N5 None 20,000 No

 Claire's compensation of $180,000 is aggregated with Dave's and Danny's compensation ($180,000 + $75,000 + $5,000 = $260,000) and limited to $150,000 for the 1996 tax year. Hence, the maximum deductible amount for the 1996 tax year is $67,050 [($150,000 + $75,000 + $100,000 + $30,000 + $25,000 + $24,000 + $23,000 + $20,000) x 15%]. If the compensation amounts are identical for the taxable year beginning July 1, 1997, the maximum deductible amount is $80,550 [($160,000 + $75,000 + $75,000 + $5,000 + $100,000 + $30,000 + $25,000 + $24,000 + $23,000 + $20,000) x 15%]. This amount is greater than the 1996 maximum deductible amount on account of the elimination of family aggregation.


  Q: Can 401(k) plans accept after-tax contributions? -TOP
A: Yes. Although after-tax contributions cannot be made to a CODA, a CODA may form a part of a 401(k) plan under which after-tax contributions may be made. Those contributions must be allocated to a separate account. After-tax contributions to a plan that includes a CODA must be combined with employer matching contributions (if any) and must satisfy the actual contribution percentage test. Also, special restrictions apply to the vesting and distribution of after-tax amounts.
  Q: What eligibility requirements may be imposed on a 401(k) participant for purposes of receiving a discretionary nonelective contribution allocation? -TOP

A: A minimum hours requirement of up to 1,000 hours may be posed. For example, if a plan requires 1,000 hours of service, an active or terminated participant who works fewer than 1,000 hours will not be entitled to an allocation of discretionary nonelective contributions. 

A requirement that the participant be employed on the last day of the plan year may also be imposed. This requirement would generally preclude any terminated employees from receiving a portion of the nonelective contribution.


  Q: How much compensation can be used for calculation plan contributions or benefits? -TOP
A: There is a limit on the amount of compensation that can be taken into account for computing plan contributions and benefits and for applying nondiscrimination tests. The 1998 limit is $160,000. This amount will be adjusted for inflation in $10,000 increments. 
  Q: What are the basic limits for a 401(k) plan? -TOP
A: The amount of annual additions allocated to a participant cannot exceed the lesser of $30,000 or 25 percent of the participant's com­pensation. 
  Q: Are there special limits that apply to elective contributions? -TOP
A: There is an annual limit on the amount of elective contributions that may be made by an individual to the 401 (k) plan. The 1998 limit is $10,000, and it will be adjusted for inflation in $500 incre­ments. 
  Q: What length of service requirement may a 401(k) plan impose? -TOP
A: A 401(k) plan may require up to one year of service before allowing employees to make elective contributions. If a 401(k) plan also provides for employer contributions, employees can be required to complete up to two years of service before becoming entitled to receive those contributions. In that case, however, the law requires employees to be 100 percent vested in their accounts attributable to employer contributions.
  Q: How do maternity or paternity leaves of absence affect the determination of whether an employee incurs a one-year break in service for purposes of vesting? -TOP
A: Solely for the purpose of determining whether an employee has incurred a one-year break in service, an employee absent from work on account of a maternity or paternity leave of absence must be credited with up to 500 hours of service. The number of hours of service credited during the absence will be the number of hours of service that otherwise would normally have been credited or, if that number cannot be determined, eight hours of service per day. The hours will be credited to the vesting computation period in which the absence begins, if an employee would be prevented from incurring a one-year break in service, or in the immediately following vesting computation period. A maternity or paternity leave of absence is any absence from work as the result of the pregnancy of the employee, the birth of the employee's child, the placement of the employee's adopted child, or the caring for the child after its birth or placement. Additional hours are not explicitly required for unpaid leave under the Family and Medical Leave Act of 1993 (FMLA). However, the FMLA regulations do state that any period of unpaid FMLA leave shall not be treated as or counted toward a break in service for purposes of vesting in a retirement plan. In addition to maternity and paternity leave, FMLA leave can include up to 12 weeks for a serious health condition affecting the employee or a family member.
  Q: Under what circumstance will the nonvested portion of a participant's account balance be forfeited?-TOP
A: The forfeiture of a participant's non-vested accounts will ordinarily occur only after the participant's termination of employment.
  Q: What happens if the participant's elective deferrals for the taxable year exceed the annual cap?-TOP
A: If a participant has excess deferrals (the amount by which a participant's elective deferrals exceed the annual cap) based only on the elective contributions made to a single 401(k) plan, then the plan must return the excess deferrals to the participant. It could happen, however, that a participant has excess deferrals as a result of making elective contributions to 401(k) plans, SARSEPs, SIMPLE retirement plans, and 403(b) annuity contracts of different employers. If the 401(k) plan so provides, the participant may notify the plan of the amount of excess deferrals allocated to it no later than April 15 (or any earlier date specified in the plan). The plan is then required to distribute to the participant no later than April 15 the amount of the excess deferrals allocated to the plan by the participant.
  Q: What is the income allocable to excess deferrals? -TOP
A: The income allocated to excess deferrals is the amount of the allocable gain or loss for the taxable year of the participant. If the plan so provides, it also includes the allocable gain or loss ,for the gap period, which is the period between the end of the participant's taxable year and the date of distribution. 
  Q: What happens if excess deferrals are not corrected? -TOP
A: It depends on how they arise. If excess deferrals arise out of elective deferrals made to one or more plans maintained by the same employer, then the qualification of the plan is at risk. This is because Code Section 401(a)(30) provides that a plan cannot accept elective contributions in excess of the annual cap. If, on the other hand, the excess deferrals arise out of elective deferrals made to plans maintained by unrelated employers, the excess deferral will be included in gross income twice: in the taxable year in which the excess deferral was contributed, and in the taxable year in which the excess deferral is ultimately distributed to the participant. 
  Q: How does Code Section 415 limit annual additions to a 401(k) plan? -TOP
A: Code Section 415 limits the annual additions that may be allocated to an individual's account in any limitation year. The limitation year is the calendar year unless another 12-month period is designated in the plan document. For 1998, the maximum annual addition is the lesser of 25 percent of compensation or $30,000.
Q: Is the $300,000 limit indexed for inflation? -TOP
A: Yes, the $30,000 limit is indexed for inflation. However, under the General Agreement on Tariffs and Rade (GATT) pension provisions, the dollar limit must always be a multiple of $5,000 and will always be rounded to the next lowest multiple of $5,000. 
  Q: What is the maximum amount of combined employee/employer funding that can be deferred on a pre-tax basis in a participant's 401(k) on an annual basis? -TOP

A: Maximum contribution funding in 401(k) from all employee and employer sources is $35,000, using a 401(k) combined with a money purchase plan. Without a money purchase plan the maximum is $22,500. Maximum annual employee 401(k) contribution: $10,500 Maximum annual employer 401(k) contributions: $12,000.


  Q: Can a SIMPLE IRA be rolled into a 401(k)? -TOP
A: No. A SIMPLE IRA is still an IRA, not a qualified plan, and therefore a distribution from a SIMPLE IRA cannot be rolled over to a qualified plan, including a 401(k). (TAG 4/25/2001)
  Q: Can employee salary reductions and employer matching contributions made to a NON-qualified plan be transferred to a 401(k) after the close of the plan year? -TOP
A: Yes. There is a private letter ruling that allows HCEs to contribute to a nonqualified plan, and then the have the contributions transferred to a 401(k) plan, up to the level where the plan can still pass the ADP test. Example: An employer maintained both a qualified 401(k) plan and a nonqualified deferred compensation plan, both of which provided for salary deferrals. If, for a plan year, a participant elected to have salary deferrals under the nonqualified plan transferred to the qualified 401(k) plan, the lesser of the calculated ADP and ACP limits or the participant's salary deferrals under the nonqualified plan would be transferred to the 401(k) plan. According to an IRS letter ruling, if the transfers of salary deferrals as contributions to the 401(k) plan are timely paid and allocated, they can be excluded from gross income under Code Sec. 402(e)(3). The IRS also ruled that the maximum permissible salary deferrals that can be transferred to the 401(k) plan would be determined with reference to the year in which they were earned rather than the year in which they were transferred.(TAG)
  Q: How much time does an employer have before 401(k) contributions must be deposited? -TOP
A: The earliest date on which such contributions can reasonably be segregated from the employer's general assets, or the 15th business day of the month following the month in which they would otherwise have been payable to the participant in cash. The regulations provide three examples of what constitutes a reasonable period of time. Small company with a single payroll system: In this case, two business days is a reasonable period of time. Large national corporation with several payroll centers and outside payroll processing: Each payroll center has a different pay period. Each center maintains separate accounts on its books for purposes of accounting for that center's payroll deductions and provides the outside payroll processor the data necessary to prepare employee paychecks and process deductions
  Q: Can an employee make a cash or deferred election in regard to a bonus that may not be paid until several months in the future? -TOP
A: No. Cash or deferred elections are limited to "currently available" amounts. This term generally describes amounts that have already been paid or that an employee is able to receive at his or her discretion.
  Q: Are 401(k) participants eligible to contribute to private IRA accounts? -TOP
A: Yes. Certain guidelines must be followed: Participant can contribute up to $2000, but the tax deduction of the contribution begins to fade as the AGI (adjusted Gross Income) reaches beyond $33,000 for singles, or $53,000 for couples.
  Q: Can a plan be amended to make the length of service requirement longer? -TOP
A: Yes, as long as the amendment applies only to employees who have not satisfied the current eligibility requirement as of the date the amendment is executed or effective, whichever is later.
  Q: If a 401(k) plan has a plan year of Jan-Dec, can an employee choose to have payroll deferrals in January of 2002 apply towards his 2001 deferrals? -TOP
A: No.

Answers to 401k Safe Harbor

Q: Can 401(k) Safe Harbor Plans Provide Matching Contributions on Both Pre-Tax and After-Tax Employee Deferrals? - TOP
A: 401(k) Safe Harbor Plans Can Provide Matching Contributions on Both Pre-Tax and After-Tax Employee Deferrals. 401(k) plans that match employee contributions on both a before-tax and after-tax basis, can meet the safe harbor. Such plans can also treat after-tax contributions in the same manner as before-tax deferrals when a plan provides for a 12-month suspension of contributions upon a hardship withdrawal. These changes expand the universe of plans that can consider a safe harbor design.
  Q: Can Profit-Sharing Plans Add 401(k) Safe Harbor Provisions During a Plan Year? - TOP
A: Profit-Sharing Plans Can Add 401(k) Safe Harbor Provisions During a Plan Year. An existing profit-sharing plan can be amended as late as 3 months prior to the end of a plan year (October 1 for calendar year plans) to add 401(k) provisions that satisfy the safe harbor.
  Q: May matching contributions be made on a discretionary basis in a safe harbor 401(k) plan under Code Section? -TOP
A: No. Unless an employer elects to make a nonelective contribution of 3 percent of compensation, an employer is required to make the matching contributions at the level set forth in Code Section 401(k)(12). Last day and/or minimum hours requirements for matching contributions are not permitted.


  Q: What is a safe harbor 401(k) plan? -TOP
A: A safe harbor 401(k) plan is a 401(k) plan under which an employer will no longer be required to perform nondiscrimination testing of elective contributions or matching contributions. To land within the safe harbor, a 401(k) plan must meet certain employer contribution requirements and, like a SIMPLE 401(k) plan, must provide for 100 percent immediate vesting of these contributions. Other limitations that apply to SIMPLE 401(k) plans--reduced elective deferral limits and exclusive plan requirements--do not apply to safe harbor 401(k) plans. This should make safe harbor 401(k) plans attractive to more employers than are attracted to the SIMPLE 401(k) option.
  Q: When can an employer adopt a safe harbor 401(k) plan? -TOP
A: Employers are able to adopt safe harbor 401(k) plans starting with plan years beginning in 1999.
  Q: What employer contributions are required to be made to a safe harbor 401(k) plan? -TOP
A: Under a safe harbor 401(k) plan, and employer can elect to provide either of the following contributions. 
1. A dollar-for-dollar match on elective contributions up to 3 percent of compensation and a 50 cents-oL-the-dollar match on elective contributions between 3 percent and 5 percent of compensation (the basic matching formula); or

2. A 3 percent of compensation nonelective contribution.

  Q: What requirements must be met by a matching contribution in order to qualify for the safe harbor? -TOP
A: To qualify under the safe harbor, a matching contribution must meet two requirements. First, an employer is required to provide to each non-highly compensated employee a dollar-for-dollar match on salary deferrals up to 3 percent of compensation and a 50 cents­on-the-dollar match on salary deferrals between 3 percent and 5 percent of compensation. Second, the rate of matching contribution for any highly compensated employee at any rate of salary deferral cannot be greater than the rate of matching contribution provided to non-highly compensated employees. Example. S&L Corporation sponsors a 401(k) plan covering the employees of its two divisions, A and B. The rate of matching contribution for Division A satisfies the safe harbor requirements as described above. The rate of matching contribution for Division B is slightly more generous as it extends the dollar-for-dollar match on salary deferrals from 3 to 4 percent of compensation. If any of the employees of Division B are highly compensated while there are non-highly compensated employees of Division A, the 401(k) plan will no longer be considered a safe harbor plan, since the elective contributions of Division B's highly compensated employees will be matched at a greater rate (dollar for dollar on elective contributions between 3 percent and 4 percent of compensation) than the rate of match for the noL-highly compensated employees of Division A (50 cents on the dollar for elective contributions between 3 percent and 4 percent of compensation).
  Q: Can other matching contribution formulas satisfy the safe harbor? -TOP
A: Yes. If the aggregate amount of matching contributions under an enhanced matching formula at any given rate of elective contributions is at least equal to the aggregate amount of matching contributions that would be made under the basic matching formula, (L-7) then the alternative formula will satisfy the safe harbor. An alternative formula will not satisfy the safe harbor, however, if the rate of matching contribution increases or if, at any rate of elective contributions, the rate of matching contribution that would apply with respect to any HCE who is an eligible employee is greater than the rate of matching contributions that would apply with respect to an NHCE who is an eligible employee and who has the same rate of elective contributions. 
  Q: Is there any other restriction that applies to safe harbor formulas? -TOP
A: Strangely enough, a match formula will fall, in part, outside the safe harbor if the formula is too generous. If a 401(k) plan matches elective contributions in excess of 6 percent of compensation, the safe harbor no longer applies to the matching contribution, and those contributions together with any after-tax employee contributions are subject to discrimination testing. The safe harbor still applies, however, to the elective contribution part of the plan.  Example. Telinda Corporation sponsors a 401(k) plan that satisfies the safe harbor formula here, but it also provides an additional match at the rate of 10 cents on the dollar on elective contributions between 5 percent and 10 percent of compensation. The safe harbor no longer applies to the matching component of the 401 (k) plan because there is a matching contribution with respect to elective contributions in excess of 6 percent of compensation. The safe harbor continues to apply to the elective contribution component of the plan; hence, elective contributions will be exempt from discrimination testing.
Q: May an employer make other contributions to a safe harbor 401(k) plan? -TOP
A: Yes. Unlike SIMPLE 401(k) plans, in the case of a safe harbor 401(k) plan, an employer is permitted to make other contributions. For example, an employer that provides a safe harbor matching contribution could also make a profit sharing contribution. This flexibility is not afforded to the sponsor of a SIMPLE 401(k) plan.
  Q: What conditions, if any, can be placed on the receipt of the matching contribution or the 3 percent nonelective contribution in a safe harbor 401(k) plan? -TOP
A: No conditions may be imposed. Therefore, once an employee has satisfied any age and service requirements under the 401(k) plan and has become a participant, the employer must make the required contribution (match or 3 percent-of-compensation nonelective contribution) whether or not the participant is employed on the last day of the plan year or has completed 1,000 hours of service during the plan year. In this respect a SIMPLE 401(k) plan has the advantage, since the 2 percent of compensation nonelective contribution under a SIMPLE 401(k) plan need not be given to participants whose compensation during the plan year is under $5,000.

  Q: Are safe harbor 401(k) plans exempt from the top-heavy rules? -TOP

A: Safe harbor 401(k) plans, unlike SIMPLE 401(k) plans, are not specifically exempt from the top-heavy rules. However, under present law, 3 percent-of-pay nonelective contributions made to meet the safe harbor can be credited toward an employer's top­heavy minimum contribution obligation. [Treas Reg § 1.416-1, Q&A M-18] Pointing to the Committee Reports discussing Section 1433 of SBJPA, some commentators believe that matching contributions to a top-heavy safe harbor 401(k) plan can also be used by an employer to help satisfy its minimum contribution obligation.
  Q: What special vesting rules apply to safe harbor 401(k) plans? -TOP
A: A safe harbor 401(k) plan, like a SIMPLE 401(k) plan, must provide that the safe harbor matching or 3 percent-of-compensation nonelective contribution be 100 percent immediately vested. Any other employer contributions to a safe harbor 401(k) plan can be made subject to a vesting schedule.

  Q: How much time does an employer have before committing to Safe Harbor? -TOP

A: Instead of being required to commit to a safe harbor design before the start of a plan year, an employer can wait up to 30 days before the last day of a plan year (i.e. November 30th) to decide to use the safe harbor nonelective contribution method (generally, a 3% across-the-board contribution to all eligible participants). Two notices are required. First, the standard safe harbor notice, provided at least 30 days prior to the beginning of a plan year, must state (1) that the plan may be amended during the plan year to allow for the safe harbor contribution, and (2) that the plan sponsor will provide a supplemental notice to eligible employees at least 30 days before the end of the plan year informing them of such amendment. The supplemental notice can be included in the safe-harbor notice for the following plan year. Employers can choose each plan year whether to make safe harbor nonelective contributions, which provides significant flexibility.
  Q: When can an employer discontinue Safe Harbor? -TOP
A: During a plan year, safe harbor matching contributions can be discontinued for the remainder of the plan year as long as the plan satisfies the ADP/ACP tests for the entire plan year. Employers must notify participants at least 30 days in advance of the discontinuance of the safe harbor. The notice must explain the consequences and indicate that eligible participants have a reasonable period of time to change their deferral elections in light of the suspension of matching contributions. The plan can continue to make matching contributions that do not meet the safe harbor.
  Q: Can Safe Harbor plans provide for both pre-tax and after-tax contributions? -TOP
A: 401(k) plans that match employee contributions on both a before-tax and after-tax basis, can meet the safe harbor. Such plans can also treat after-tax contributions in the same manner as before-tax deferrals when a plan provides for a 12-month suspension of contributions upon a hardship withdrawal. These changes expand the universe of plans that can consider a safe harbor design.
  Q: Can profit-sharing plans add 401(k) Safe Harbor during the plan year? -TOP
A: An existing profit-sharing plan can be amended as late as 3 months prior to the end of a plan year (October 1 for calendar year plans) to add 401(k) provisions that satisfy the safe harbor.

  Q: How does a Safe-Harbor Plan compare with an Enhanced Match plan? -TOP

A: Safe Harbor Plan: 100% nonelective matching contribution to first 3% of payroll, then 50% nonelective matching contribution from 3-5% of payroll. All Safe Harbor contributions 100% vested.  Enhanced Match: 100% nonelective matching contribution to first 4% of payroll. All Enhanced contributions 100% vested.
  Q: What is the "Safe Harbor Notice" and where is it provided? -TOP

A: The Safe Harbor Notice is government-sanctioned text that does not relate to the safe-harbor matching provisions of a 401(k), but rather the options and rights of persons who are receiving distributions from a pension plan. The text of the Safe Harbor Notice can be found in the Summary Plan Description provided to all 401(k) Pro clients. 


Additional non-profit websites that include relevant unbiased information about 401k plans include: www.easy401konline.com 


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