PLANSPONSOR - November/December 2017 - 14

Upfront
Considering
A Safe Harbor
Plan Design?
A PLAN without a safe harbor is subject
to average deferral percentage (ADP) and
average contribution percentage (ACP)
testing requirements, notes Jason Gross,
Ubiquity Retirement & Savings' director
of national sales and development, in
Chicago.
In many cases, the ADP for nonhighly
compensated participants limits
how much their highly compensated
co-workers may contribute to the company
401(k). " This can be problematic, especially
with a small business, " Gross says.
To remedy this, the Internal Revenue
Service (IRS) allows for a safe harbor
plan design, which will eliminate nondiscrimination-testing
requirements if the
employer makes certain contributions to
its plan, says Steve Friedman, shareholder
at Littler Mendelson P.C. and co-chair of
the firm's employee benefits practice
group, in New York City. He notes that
employer contributions must be fully
vested by the date of deposit into the plan.
Gross explains that under the safe
harbor plan rules, plan sponsors may
make what is called a qualified nonelective
contribution (QNEC) equal to at least 3%
of the compensation of each non-highly
compensated employee (NHCE) eligible
to participate in the plan, including those
who do not. Alternatively, the employer
could agree to provide a 100% match on
employees' effective contributions up to
3% of compensation and a 50% minimum
match on employee elective contributions
up to the next 2%. He says the latter is the
more popular option.
Plan sponsors may also use an
enhanced match formula of 100% of the
first 4% of pay an employee contributes
to the plan-the minimum required
under this option; 100% of the first 6%
of pay is the maximum allowed to still
pass the ACP test.
Should plan sponsors find themselves
in a financial bind over the cost of
offering these plans, the IRS has issued
rules for relief.
According to Gross, most plan sponsors
adopting a new safe harbor plan use a
prototype document. They must note the
particular features they want, in the adoption
agreement, which must be signed
prior to October 1 to be effective for that
year-the IRS requires the first plan year
to be at least three months long. Then a
written notice must be delivered to participants,
also before October 1. Deposits of
contributions need to be made in October
to get that three months of coverage.
Friedman says any employer may take
advantage of the safe harbor plan design,
not just small ones. And, if a plan sponsor
14 PLANSPONSOR.com November-December 2017 Art by Wren McDonald
has an existing plan it wants to convert to a
safe-harbor design, amendments would be
required to the sections covering matching
and nonelective contributions, as well as
to some others. Or a sponsor may wish to
restate its plan entirely.
Conversions to safe harbor plan
designs need to happen as of the first day
of the plan year, with a 30-day prior notice
to plan participants, Gross says.
For plans that were unable to meet
the October deadline he says they should
consider the safe harbor next October.
" Small business owners are overwhelmed
with their business, and often something
like this is on their to-do list but continues
to be pushed down by other priorities, "
he says. " It is important to get the
word out about these plans so employers
can start planning in advance. "
-Rebecca Moore
http://www.PLANSPONSOR.com
PLANSPONSOR - November/December 2017

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