Welcome to 401(k)ompass, a series of 2-minute videos to help you manage your 401(k) more effectively by addressing current issues and challenges.

In this episode, Vice President and Director of Relationship Management Lindsay Luketic explains how Safe Harbor provisions work and why they matter for plan sponsors dealing with non-discrimination testing.

Every 401(k) plan is subject to IRS non-discrimination testing. When a plan fails, the consequences usually fall on highly compensated employees in the form of refunds, and sometimes penalties for the plan sponsor. Safe Harbor provisions offer a way around most of that testing, in exchange for the employer making certain contributions on a defined vesting schedule.

Lindsay walks through the three most common Safe Harbor structures:

  • The basic match (dollar for dollar up to 3%, then 50 cents on the dollar on the next 2%)
  • A flat 3% non-elective contribution to all eligible employees
  • The QACA, a Qualified Automatic Contribution Arrangement that requires automatic enrollment and an auto-increase feature, but allows vesting to stretch to a 2-year cliff schedule

This quick overview explains the key elements of Safe Harbor design and can help you evaluate whether this approach makes sense for your organization. Safe Harbor isn’t the right fit for every plan. But if your highly compensated employees are routinely receiving refunds, it’s worth a closer look.

 Video Transcript

Hi, I’m Lindsay, and today we’re going to talk about Safe Harbor provisions. Every retirement plan is subject to IRS non-discrimination testing, and if you fail that testing, that could potentially mean refunds and sometimes penalties. So Safe Harbor provisions allow you to skip most of that testing, as long as the employer makes certain contributions and has a certain vesting schedule.

There are several different ways you can structure the Safe Harbor setup. The first and most common is the basic Safe Harbor match, which is dollar for dollar up to 3% and 50 cents on the dollar on the next 2% of pay. Another structure is a flat 3% contribution to all eligible employees. Now both of these structures are required to be 100% vested immediately. Another structure that meets the Safe Harbor requirements is called QACA, the Qualified Automatic Contribution Arrangement. There are different ways to structure that match. You have to have automatic enrollment and an automatic increase feature, and you can actually stretch the vesting out to a two-year cliff schedule.

Safe Harbor provisions may not be right for every plan, but if your plan has failed testing, if those high earners are having to receive refunds back, this may be something for you to consider and to look into. So if you’d like to learn more, please feel free to reach out to us. We’d love to help.