Just How Safe Is Your Safe Harbor 401(k) Plan?
Safe Harbor 401(k) Plans have many advantages. More than likely, the primary reason your company opted for adopting a Safe Harbor plan is that someone told you all your “testing will pass.” Well, sorry to break it to you, but only some testing will pass. Depending upon the provisions within your Safe Harbor plan (how it was designed), it is very likely that other tests are required but are not being performed. So, what does one do if this is happening? First, let’s give you some background and then take a look at what tests might be relevant. Finally, we’ll help you identify any issues, seek resources, and apply fixes (corrective measures).
Background – All Tests Are Not Equal
Safe Harbor provisions will automatically satisfy nondiscrimination testing for Salary Deferrals (that’s your ADP Test). If you’ve elected a Safe Harbor Match 401(k) Plan, then the Employer Matching test will pass as well (that’s your ACP Test). But what about all the other tests you’re required to perform? You might be thinking “What other tests?” well, there are many, here are a few your Safe Harbor Plan doesn’t automatically satisfy:
- 415 Annual Additions
- 402(g) Limit
- 414(s) Compensation
- 401(a)(4) Coverage
- Et cetera, et cetera…
Shocked? If not, then you’re either aware of these already OR you’re blissfully unaware. This, however, is one time where ignorance is not bliss. What happens if a required test, that was not performed, fails when it is performed? Potential worst case scenario – the entire plan is disqualified, your assets become subject to taxation, and your entire retirement account goes up in smoke – plus potential IRS and DOL Penalties (civil penalties). Ok, that might be a bit drastic, but not an impossibility. So, what does one do to check the safety level of the Safe Harbor Plan?
Step 1: Identify Potential Issues
A full analysis of your Safe Harbor plan’s structure is recommended. While we’ll give you a few things to look for now, you will want to speak with your vendors, advisors, and TPA (if you don’t have a TPA, drop us a line).
- Sorry, you’re not eligible for the 401(k)
- Do you exclude any types of employees from participating in the plan? For example, summer interns – are they offered the plan? Or, what about Department A – are they excluded? Who is and who is not included generally must be tested for compliance.
- Too Much Money (sometimes not a good thing)
- Has payroll accidentally contributed too much money for one or more participants? If you don’t know, ask. Or better yet, ask your TPA or 401(k) Provider it they’ve reconciled contributions against plan limits.
- We Don’t Match What Is Deferred From Your Bonus
- What does the Plan consider Compensation to be? W-2? Or, perhaps, compensation is pay codes 5 through 29 and sometimes 54, but never 87, maybe? What is the Plan Compensation for Deferrals – is it different than Match and/or Profit Sharing? If so, you’ve got some testing to do.
Step 2: Seek Out Experts
Skill sets vary, it’s prudent to seek out experts to assist you and the plan. Industry experts are the best – Financial Advisors who make 401(k) plans a core focus, TPAs, HR/Benefits Specialists, ERISA council, and the like. If all else fails, give us a shout and we’ll help you out.
Step 3: Apply The Fix & Move Forward Confidently
If a concern is real and your experts are at the ready, they’ll work with you on a Fix-It Plan. Follow their plan to correct any current issues and then implement one that will mitigate if not eliminate future concerns.
Safe Harbor Plans are great tools. They offer a world of benefits for employers and employees. Who you enlist to help manage the plan can save you time, money, and frustration. Always follow your Plan Documents and abide by governing law and regulations. Seek people smarter than you to help where it makes the most sense.