Commonly Asked Questions About Safe Harbor 401(k)s

With many business owners continuing to experience economic challenges, employers are seeking ways to reduce or eliminate retirement plan contributions as one way to control their business costs. The following are answers to some of the most frequently asked questions about eliminating or freezing fixed contributions under safe harbor 401(k) plans.

  • May an employer freeze a safe harbor 401(k) plan mid-year or, in the alternative, amend it into a traditional 401(k) plan mid-year?

An employer may freeze or amend mid-year a safe harbor 401(k) plan which provides a safe harbor matching contribution (basic or enhanced) formula, in order to reduce or eliminate future safe harbor matching contributions. However, an employer may not freeze or amend mid-year a safe harbor 401(k) plan which uses the safe harbor non-elective contribution formula. The only way to eliminate the safe harbor non-elective contribution mid-year is to terminate the plan.

  • For an employer that wishes to retain flexibility over the safe harbor non-elective contribution, what plan design options are available?

An employer may use the “maybe” notice approach with the safe harbor non-elective contribution formula. Under the maybe notice approach, the employer has until 30 days before the end of the year to decide to provide the safe harbor non-elective contribution, and thereby become a safe harbor plan for the plan year.

The employer must follow the following steps in to apply the “maybe” notice:

  1. Maintain a 401(k) plan;
  2. Provide a notice to the employees before the beginning of the year indicating that the employer may provide a safe harbor non-elective contribution;
  3. If it decides to be a safe harbor 401(k) plan, provide a supplemental notice at least 30 days before the end of the plan year indicating that it will make a safe harbor non-elective contribution; and
  4. Amend the plan to provide a safe harbor non-elective contribution.
  • May an employer terminate a safe harbor 401(k) plan mid-year?

An employer may terminate a safe harbor 401(k) plan mid-year irrespective of whether the plan uses the safe harbor nonelective contribution or the safe harbor matching contribution formula.

Assuming the employer does not terminate the plan on account of a “substantial business hardship” or an “acquisition transaction,” the employer must follow the following steps to terminate a safe harbor 401(k) plan:

  1. The employer must provide a 30-day notice to employees informing them that it intends to terminate the plan;
  2. Fund the safe harbor contribution through the termination date; and
  3. Apply the ADP and ACP tests using current year testing.

Note: The safe harbor non-elective contributions will qualify as qualified non-elective contributions, and therefore the plan may use the contributions in the ADP or ACP tests

Be sure to address more detailed questions about freezing or eliminating safe harbor 401(k) contributions with your advisor.

This article was originally published in Illuminations: Facts & Figures from people with a brighter way, a Rea & Associates enewsletter, 5/6/2009.

Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.