ADP/ACP Safe Harbors: Does Your Plan Really Fit Inside The Harbor?

When an impending storm threatens to bear down on you, ensuring that you have a safe place to go is of paramount importance. The same is also true when the IRS comes calling on your tax-qualified retirement plans. How can you be sure that your harbor is truly a safe haven from this “storm”? In general, the following are the basic plan design elements that can be implemented to qualify your plan as fitting into the “safe harbor”:

• Employer Matching Contribution
  • 100% of the first 3 % deferred plus 50% of the next 2% deferred;
• Employer Non-Elective Contribution
  • 3% of compensation to each eligible non-highly compensated employee, regardless of participation, annually;
• Vesting
  • Immediate 100% vesting of matching contribution, Below are some other, less obvious requirements that could jeopardize your plan’s ability to “fit” into the safe harbor:
• Safe Harbor Notifications
  • Must be sent to all newly eligible employees upon meeting eligibility requirements and must be provided to all eligible employees annually thereafter;
• Safe Harbor Contributions Are Not Eligible for Employee Hardships
  • Hardship withdrawals can only be made out of monies in the plan that were established using employee funds (i.e. elective deferrals).  Since safe harbor contributions are not “elective contributions”, there is a restriction on distribution of these assets.
• Initiating a Safe Harbor Plan
  • The plan needs to be in place 3 months prior to plan year end

Safe harbor plans are generally a good fit with companies who continue to fail discrimination issues as long as the company can continue to make the required contributions. A safe harbor plan still allows for automatic enrollment, which can help with increasing participation for employee deferrals.

With the above tips as a good starting point, you will be positioned to make sure you are better insulated from any inclement inquiries from the Internal Revenue Service and avoid the headaches which come along with fixing any tax compliance issues with your safe harbor.

Contact your Meaden & Moore professional to discuss your plan’s safe harbor structure or if you are considering implementing a safe harbor strategy to your current qualified retirement plan offering.