Safe Harbor + SECURE Act = Big changes!
401k and 403b plans are subject to non-discrimination testing requirements. To forgo those tests, plan sponsors can elect to take advantage of a “safe harbor” plan design. Historically, plan sponsors had to decide and declare 30 days before the beginning of the plan year (and give notice) if they’d use a safe harbor design. It needed to be one of these options:
Non-Elective: Eligible employees get an annual employer contribution of 3% of their salary. This amount is immediately fully vested and the employee gets it whether or not they contribute to the plan.
Safe Harbor Match has two options:
Basic: The employer matches 100% of the first 3% of each employee’s contribution and 50% of the next 2%. (Employees are matched, so they have to contribute to get the match.)
Enhanced: The employer matches 100% of the first 4% of each employee’s contribution. (Employees are matched, so they have to contribute to get the match.)
Qualified Automatic Contribution Arrangement: The QACA matching contribution formula is a 100% match on the first 1% of compensation deferred and a 50% match on deferrals between 1% and 6% (3.5% total). The plan must automatically enroll everyone at 3% and increase at least 1% annually to 6% (with a maximum of 15%). ***Unlike the other safe harbor formulas that have 100% vesting immediately, QACA safe harbor contributions can be subject to up to a 2-year cliff vesting schedule.***
The SECURE Act changed two VERY important things for NON-ELECTIVE (#1 above)!!
Change #1 : You now have until 30 days before the year ENDS to add a 3% safe harbor nonelective feature to your plan!
Change #2: You can now add a safe harbor nonelective contribution up to the last day of the following year if you are willing to contribute 4% of pay rather than the regular 3%. Meaning that you have until December 31, 2021 to add a safe harbor non-elective provision to your plan for 2020!
Match formula and requirements still stay the same, but procrastinating fans of non-elective contributions just got a break!
What about the notice requirement? Under the SECURE Act, plans that provide for a safe harbor nonelective contribution or a QACA that uses a safe harbor nonelective contribution are no longer required to give a notice! However, there is a special condition to this. The notice is no longer required as long as the safe harbor nonelective contribution is only being used to satisfy the ADP test. If the plan provides for a matching contribution subject to ACP testing and the safe harbor nonelective contribution is being used to satisfy both the ADP test and the ACP test, then the notice IS still required to be given to participants each year.
Need more info on the SECURE Act and all its great new things? Reach out to us or go here.
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