Safe Harbor 401(k): How the good and bad TPAs act.

The safe harbor notice deadline for calendar year 401(k) plans is coming December 1. This notice requirement is one of the requirements for a plan to be a safe harbor, in addition to the fully vested contribution that gives 401(k) plans a free past in the ADP test (for deferrals), the ACP test (for matching), and Top Heavy test. The notice in a sense is a proactive solution since you have to give the notice before the plan year starts (and you won’t be certain 100% that you failed until after the plan year ended), but most times, it is reactive because it is usually done in response to previous bad testing results.

I think one of the differences between a good third party administrator (TPA) and a bad TPA is how they handle safe harbor. Once again, a safe harbor option whether it’s the 3% non-elective, 4% match, or the automatic deferrals QACA match, it’s not for every plan. A plan that easily passes testing doesn’t need it and some plans can’t afford it. However, I have seen TPAs administer plans where the plan sponsor is already making a fully 100% vested contribution to plan participants that exceeds the contribution needed for safe harbor.  For example, I just came across a plan where the TPA is telling the client that they will likely fail the Top Heavy tests even though they make a fully vested, 7.5% matching contribution.  So even though they make a contribution that could have satisfied safe harbor, it doesn’t, so the plan sponsor has to make another 3% contribution to non-key employees.  So if a company is consistently making a fully vested contribution that exceeds safe harbor, there is no harm for making it a safe harbor, it can be a pro-active solution to make sure the demographics of the plan don’t eventually one day cause the plan to fail one or more of the discrimination tests.

Plan design is like a game of chess, it is based on strategy and finding the right moves to achieve the maximum contributions and avoiding unnecessary harm like compliance testing issues. The good TPA is going to be pro-active and have a plan formula of contribution that will maximize contributions and avoid unnecessary contributions.

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