PLANSPONSOR - February/March 2021 - 27

PLAN DESIGN | COMPLIANCE
plans with assets between $1 million and
$10 million-to the 2020 PLANSPONSOR
Defined Contribution (DC) Survey use a
safe harbor plan design.
" It depends on the retirement plan's
goals, " Gehman says. " If you have a small
business with a lot of owners who want to
maximize their retirement savings, the
safe harbor plan may just be the magic
button that gets you what you want. "
2) How much control does your
company want over the plan's
design?
Safe harbor plans must utilize one of
three options for employer contributions
and vesting:
Nonelective contributions. Contribute
at least 3% of compensation to each nonhighly
compensated employee (NHCE)
eligible for the plan, regardless of the
person's participation, to vest after two
years of service.
Basic match. Contribute a 100%
match of employees' deferrals, up to 3% of
compensation, and at least a 50% match of
the next 2%, to vest immediately.
Enhanced match. Match the first 4%,
5% or 6% of an employee's contributions,
to vest immediately.
If a plan sponsor prefers a retirement
plan that does not conform to any of those
designs, it should consider going the traditional
route rather than the safe harbor,
says Rachel Smith, a partner in law firm
Goodwin's ERISA [Employee Retirement
Income Security Act] and executive
compensation practice, in Boston.
" The lack of flexibility and the
requirement to make a contribution every
year under a safe harbor plan might not be
palatable for all businesses, " Smith notes.
The rigid vesting schedule may also
be an issue for some employers, says Lynn
Whitmore-Christiano, director, regulatory
product management at Prudential
Investments in Moosic, Pennsylvania. " If
employee retention is important, you might
want to have a design that allows you to vest
later, because that might keep employees
Safe Harbor Plan vs. Traditional 401(k) Plan
Safe Harbor Plan
Potential
Benefits
+ Lighter administrative load. Safe harbor plans
do not have to conduct annual average deferral
percentage (ADP) or average contribution
percentage (ACP) tests.
+ Highly compensated employees (HCEs) may max
out their contributions. Under traditional plans,
such contributions can be limited if they cause a
plan to fail testing.
Potential
Drawbacks
- Higher costs. If the match boosts plan participation,
or the plan design chosen makes contributions to
employees regardless of active participation, the
expense to the employer could go up significantly.
- Bigger commitment. It is more difficult for the
company to suspend a match in a difficult
financial year.
from leaving sooner, " she explains.
3) Is your company comfortable
with the potential costs associated
with this plan?
For employers that have not previously
provided a match, the expense of matching,
or of contributing on behalf of employees
who do not participate, could be significant,
Gehman says. It is important to run
the numbers with your adviser or thirdparty
administrator (TPA) to understand
the true potential cost of the plan before
committing to a safe harbor design.
" Don't design a plan that you're not
prepared to pay the full cost for, " says
Ross Krinsky, a senior vice president at
Fidelity Investments in Southborough,
Massachusetts. " That's one thing I get a
little concerned about with safe harbor
clients. Sponsors go safe harbor because
they are failing testing, but then they have
a 4% match, and all of a sudden people
start participating and the sponsor's costs
start going up. " -Beth Braverman
Traditional 401(k) Plan
+ More custom design. Plan sponsors are not locked
into a specific match or vesting formula and can
design their plan to meet their specific needs.
+ Flexibility year to year. Plan sponsors may decide
year to year whether they want to have a match.
+ Lower employer costs. As there is no required
employer contribution, the cost of implementing a
traditional plan could be lower than that for a safe
harbor plan.
- Required annual nondiscrimination testing.
Non-safe harbor plans require annual ADP or
ACP testing.
- Remedies required if testing fails. Plan sponsors
will have to refund HCE contributions or to
fund additional contributions to non-highly
compensated employees.
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PLANSPONSOR - February/March 2021

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