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\u2019t 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.<\/p>\n
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\u2019s the 3% non-elective, 4% match, or the automatic deferrals QACA match, it\u2019s not for every plan. A plan that easily passes testing doesn\u2019t need it and some plans can\u2019t 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. \u00a0For 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. \u00a0So even though they make a contribution that could have satisfied safe harbor, it doesn\u2019t, so the plan sponsor has to make another 3% contribution to non-key employees. \u00a0So 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\u2019t eventually one day cause the plan to fail one or more of the discrimination tests.<\/p>\n
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.<\/p>\n
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