401k
401k Information

401k Safe Harbor

ERISA intent

When Congress passed the Employee Retirement Income Security Act of 1974 (ERISA), it made federal law the supreme law of the land as to the regulation of pension plans and as to certain employee welfare plans. Tucked neatly within the ERISA statute, at its inception, is a commonsense provision stating that if individual participants are given responsibility for choosing their own 401(k) plan investments, then the 401(k) plan’s fiduciaries are not responsible for the participants’ investment losses. For many years after the passage of ERISA, alm 00004000 ost no notice was given to this provision.

During the 1980s, as 401(k) plans containing participant investment direction features began to replace other pension plan vehicles, ERISA Section 404(c) became a subject of significant interest.

The Dept Of Labor, (DOL) however, did not publish regulations concerning ERISA Section 404(c) until October 13, 1992, some 18 years after ERISA’s passage. Today, 404 c compliance is a mainstay objective to most employers’ plans.

Benefits for Plan Sponsors

In general, if a plan meets section 404 (c) requirements and related regulations, the plan sponsor and other fiduciaries are not liable for retirement plan losses resulting from plan participant’s investment decisions.

Compliance with 404 (c) is optional, but you should carefully consider the implications of noncompliance: you the plan sponsor, could be held liable for what happens with assets in employees retirement accounts, even though you exercised absolutely no control over their decisions.

401k plan fiduciary basics

When you agree to comply with section 404(c), your participants also benefit.

Employees know they will have access to effective tools and information they need to manage their own investments or implement advise from their financial advisor.

They can count on their employer to provide:

  • A broad and diverse range of investment options
  • Frequent opportunities to change how their accounts are invested
  • Educational opportunities that provide the information they need to make informed investment decisions

If your retirement plan allows participants to direct their own investments, compliance with section 404(c) of the employee retirement income security act of 1974 (erisa) provides protection for you the plan sponsor.

Fiduciary responsibilities

Even if relieved of liability for the participants investment decisions, the fiduciary retains responsibility for:

  • Selecting and monitoring the plans investment options to ensure they remain competitive and meet the diverse need of the plans participants on an ongoing basis
  • Periodically reviewing the plan’s operations to ensure that the frequency with which participants can change their investments continues to be appropriate given the volatility of the investment options
  • Ensuring that participants have been given sufficient disclosure about the plans investment options on an ongoing basis

A plan sponsor may have to direct an investment if a participant fails to make an investment selection. The pension protection act of 2006 provides a safe harbor to plan sponsors investing participant’s assets in qualified default investment alternatives. The plan sponsor must notify participants a reasonable time before each plan year end and:

  • Explain their rights to designate how contributions and earnings are invested
  • Explain the default investment in which contributions and earnings will be invested if no investment designation is made
  • Give participants a reasonable amount of time to make an investment designation, change their contribution amount or opt out

Frequently Asked Questions

  1. QUESTION:
    Is a Safe Harbor 401k matching contribution to a shareholder of an S-Corp a K-1 add back item?
    If an S-Corp pays matching contributions to a shareholder as part of a Safe Harbor 401k plan, does the shareholder get the benefit of the deductable expense or is it a k-1 add back item?

    • ANSWER:
      I’ve searched Revenue Ruling 91-26 and Publication 15B and can find no mention of a matching 401k contribution listed as a fringe benefit.

      The matching contribution is a deduction for the S Corporation and not taxable income to the shareholder.

      The only item to report to the shareholder is the reduction of gross wages on the W2 and the entry in box 12 of the W2.

  2. QUESTION:
    What is 401K safe harbor non-elective contribution?
    My wife was laid off in October 2009, I just got a 401k statement for the period April to June 2010. There are Safe Harbor Non-Elective Contributions for this period which amount to about 3% of what she used to get paid there. What is a Safe harbor Non-Elective Contribution. Is the employer still contributing to her 401K plan even though she no longer works there?
    Thanks for the responses…you guys mention she would not be getting the contributions if she was no longer employed. But on the statement it does show she got contributions of over 00. Maybe her company screwed up?

    • ANSWER:
      The Simple Answer is: The Safe Harbor contribution is basically the company contributing a minimum of 3% of there employees gross annual salary into the 401k Plan.

      She will not get this unless she is employed at the company.

      The reason for this is because ERISA 401(k) plans have to go through what the industry terms cross-testing. Cross testing, in short, is the governments way of making sure that not just the executives are reaping the benefits of the 401k plan. What most people don’t know, is that if your 401k plan doesn’t have a minimum safe harbor, the executives of a company are actually capped at the percentage they can contribute to their 401k based on what the “Normal, Rank and File” employees put in per percentage.

      Most of the time the Executives don’t want to deal with this, so they just institute the safe harbor match, and work it into the overall “Matching Contribution”, then they don’t have to worry about this regulation.

  3. QUESTION:
    Is it too late to start a safe harbor 401k for my small business for 2008?
    started the business 1 yr ago and cash flow is only now sufficient to set up a plan, but I was told by a bank agent that its too late for 2008 as of 9/10/08

    • ANSWER:
      your bank agent was wrong. Brand new employers can start a new safe harbor plan with as little as one month left in the year or November 30th. However, existing companies who do not have a current 401k plan can start a new plan no later than 3 months left in the year or September 30.

      safe harbor plans require adequate notice to be provided to the employees in order to give them time to make decisions prior to the start of the year. That’s the reason for the 90 days.

      Make an appointment with a local third party plan administrator. They will help you get one going. A smart and good one will do it with the type of investments that fit your business model and won’t try to push you into any investment choices. They should be consultants and not salesmen. You’ll have to pay for their services but it will be worth it to you. Especially once your business becomes very successful…they’ll be able to modify your plan to really allow you to put away a lot of $$.

  4. QUESTION:
    Safe Harbor 401k 100% vested what does this mean?
    thank all of you that answered my last first question about my boss not giving me back my 401K unless I pay a 5 penalty.
    I have ask to have a copy of my 401k balance sent to me, along with a copy of the plan. I keep reading is about being 100% vested from day one. I did manage to have them e-mail me a few pages of the plan before it was decided to stop that and send all the documents to me by mail. The one sheet that interested me most is titled “EMPLOYMENT TERMINATION (VESTING AND FORFEITURES) and a scale ranging from 0% vested to 100% vested with “years of service” starting with 0% for less than 2 years up to 100% for six years, I guess what I am asking is if I was 100% vested by this safe harbor 401K than why is this scale needed.

    • ANSWER:
      Vesting, or ownership of the account balance, is determined by the source of the money:

      Contributions that you make are always 100% vested, meaning that you always own all of the money you invest in your 401(k).

      Contributions that your employer makes may follow a schedule where the vesting percentage (or % you own) increases every year you work for the employer, for as many as seven years, until you own 100% of the account balance.

      Your employer chooses the vesting schedule that applies to your plan. If your employment is terminated before your employer’s contribution is 100% vested then a percentage of those funds will go back to them.

  5. QUESTION:
    What is a 403b safe harbor plan?
    I’ve been working for a year now in retriement and among the things I need clarified is what a “safe harbor” plan is. What would be the difference if it was a regular 403b plan versus being a 403b safe harbor plan? Is it the same difference as a 401k versus a 401k safe harbor plan? What is the testing it goes through to show it is a “safe harbor” plan?

    • ANSWER:
      All Safe Harbor plans mean is that your employer will contribute a certain % of your salary to a retirement account for you automatically, whether or not you are enrolled in the company 401K or 403B program.

      My company gives 3% of my yearly gross pay to my 401K automatically… some companies choose a 403B or 401K Match program instead, where they choose to match say 50% of however much you put in during the fiscal year.

      So, that’s all a safe harbor plan means.. money for nothing pretty much!

  6. QUESTION:
    401K-Safe Harbor, termination plan distribution question?
    I left my job in March of 08. My Plan states that my benefits are 100% vested at all times and can be paid to me as soon as administratively possible after all final contributions are made. I contacted the Department of Labor and the booklet they sent me states that in Table 7, Federal Law states that your plan must allow you to begin receiving benefits when terminating your service with the employer* * For administrative reasons, benefits do not begin immediately after meeting these conditions but at a minimum, your plan must provide that you will start receiving benefits within 60 days after the end of the plan year. End of my plan year was 12.31.08.

    I filed a claim with the plan administrator, it was denied saying that the accounts aren’t completely funded and may not be until September of 09. From what I am understanding, they have (Under Federal Law) 60 days from the end of the plan year to pay up…..and I reading this correctly? I think I am and I am going to appeal this, but I want to make sure I am interpreting this the right way.
    The plan administrator has continuously said that I cannot take my money out. What I mean by receiving benefits is taking all my money out, it is 100% vested at all times and YES there are more contributions to be made for 2008. He has not completed them yet, and from what I am understanding, he has 60 days to do so after the plan year…which ended on December 31, 2008. These are the specifics of my plan.

    • ANSWER:
      According to tax law, for deductibility purposes the plan has up until the extension due date of the company’s tax return in order to make the contributions required for 2008 which is that September date that they are referring to. That is what they are waiting for; because the dont want to make a duplicate payment and they want to wait until the very last second to make the contribution. Off the top of my head he has until 12/31/2010 to actually make the contribution (though it won’t be tax deductible).

      If you truly want your money offer to pay for the cost of the residual distribution. They then have no valid reason not to issue a check now and a residual check later.

  7. QUESTION:
    Explain the different 401k programs, such as traditional, safe harbor and simple.?

    • ANSWER:
      A SIMPLE (Savings Incentive Match Plan for Employees) is not a 401k. It is a qualified plan design that is appropriate for small businesses (100 or fewer employees) that want a retirement plan but cannot afford a 401k, profit sharing, or other such plan. A SIMPLE plan has two contribution sources, employee elective contributions and employer contributions. The employee gets to choose to defer up to ,000 per year into the plan. The employer has to either match employee contributions dollar for dollar on the first 3% of salary deferred, or contribute 2% of salary to all eligible employees, whether they defer their own pay or not.

      A 401k by comparison gives the employer alot more flexibility and control, allowing the plan to be designed with vesting schedules (Employer contriubutions on your behalf aren’t all yours right away), flexibility of employer contributions (Employer can choose whether or not to match, have annual profit sharing contribution, etc) and more stringent eligibility rules. 401k’s also have higher contribution limits.

      The Safe Harbor provision for a 401k is a provision that when adopted allows for the elimination of certain annual tests. this results in a plan that allows highly compensated employees to contribute the maximum amount from their own pay regardless of the participation rate of the non-highly compensated employees. In order to qualify for the Safe Harbor provision, the employer has to provide a match of at least 100% of the first 3% of salary deferred plus 50% of the next 2% of salary deferred. in essence, any employee that contributes 5% of their salary or more would receive a 4% of salary employer match.

  8. QUESTION:
    What is a safe harbor hardship distribution?
    I need to take money from my 401k because I’m sinking in payments. I dont want to take a loan .Payments are killing me already.

    • ANSWER:
      It depends on what you need it for. If you are just hurting for money, you can’t withdraw money to pay bills. You can stop your contributions temporarily and use the money you would have contributed to help out for a while.

      If medical bills have hurt you, you are able to withdraw money without penalty (ordinary tax only).

      If you absolutely have to use 401(k) funds and need to withdraw money, you are looking at ordinary income tax plus a 10% early withdrawal penalty.

      Hope this helps.

      Ron, ChFC

  9. QUESTION:
    What is an employee safe harbor program?
    I have a contribution to my 401k from this and I am not sure what it is.

    • ANSWER:
      If you are referring to what is know as a safe harbor provision with in your 401k plan here is your answer.

      Your employer can elect this provision but has to make a contribution on your behalf (typically 3%) or match your contribution dollar for dollar (typically 4%).

      The owner of your company and other highly compensated employees may be limited in their contribution levels if your plan has poor participation. These individauals know as highly compensated employees or HCE’s are restircted on how much they can contribute to their account if your 401k plan does not meet specific criteria. This is a goss over simplification but I am keeping it simple. By electing a safe harbor provision and making a mandatiory match or contribution on your behalf the HCE’s have no restrictions on contribution level other than that emposed by the IRS.

      Your employer has agreed to give you additional $ so he/she and HCE’s can also contribute the maximum to their own account. Matches are a huge beneif to any 401k plan you should thank your employer. You can direct the investments for these safe harbor dollars dollars just like you do with your contributions.

      As for distributions, this is also regulated by the IRS. Your employer can only force you to take funds if your account is under a certain balance, as of last check ,000. Safe harbor has no impact on if you have to take a distribution or not.

  10. QUESTION:
    ex-employer will not give me my 401K?
    I lost my job and need the money that I have put into my 401k. My boss told me that we have a safe harbor 401k and that I have to wait until next year after taxes to get my money unless I want to pay a 5 fee. I have never received any thing about the plan except the 0 that I have taken out every pay check. Nothing showing me my balance or even the company how is handling it. All I know is that my boss is the trusty of the plan.

    • ANSWER:
      I agree it’s a weird plan. You should be getting quarterly statements of your account.

      Ask for a statement of your account. You are entitled to know your account balance.

  11. QUESTION:
    Do i need to contribute to my 401k to be eligible for profit sharing at the end of year?
    My company recently changed from 4 % safe harbor to Profit sharing. So am wondering whether stopping my contribution to 401k will effect my share of funds from profit sharing?

    • ANSWER:
      Usually not, but you should ask, just to make sure. Some companies have a minimum amount that you need to defer in order to be eligible, but there are plenty of companies who do not. This is usually to keep them clear of compliance issues if there are only a few very highly compensated employees in your workplace. That way, they can contribute to everybody, and everyone is a participant. They dodge a lot of legal issues in a simple step.

      But on another note, why would you want to stop contributing? if there is still the option of the 401(k), use it! Most companies who have profit sharing, have both that and a match for the 401(k). That’s free money you’d be giving up.

      But if you’re in a really tight spot, no, it probably won’t affect your ability ot receive profit sharing. And as for how much you get, it’s usually applied by either a percent of salary or by years of service, neither of which would make your contributions affect your share.

      Hope that helps. :0)

  12. QUESTION:
    How much should I contribute to my 401k?
    It is a safe harbor plan and my company will contribute 3%. What % of my salary should I contribute? I’m 23 years old and this is the only retirement plan I am currently enrolled in.

    Also they gave me a list of 12 funds to choose from to contribute to. Should I invest in all of them?

    • ANSWER:
      I would contribute up to the match, Then I would save additional money in a Roth IRA.
      You need to develop an asset allocation.
      Choose the mutual funds per your asset allocation.
      Choose the best funds available in your plan.
      That may be one fund such as a 2050 fund but in general I refer you pick out the best per an asset allocation.

  13. QUESTION:
    Why would my employer pick a 401k over a SEP IRA?
    Is it true that with a SEP IRA my employer would have to give all employees the same percentage he gives himself?

    also…why would my employer agree to do the Safe Harbor matich? What’s in it for him?

    • ANSWER:
      Yes, that’s what a SEP is…he would have to provide most of his employers the same percentage in a contribution as he would receive. A SEP really makes little or no sense these days….Don’t fault your employer for taking advantage of better plans that are available to him.

      He does the safe harbor match rather than a straight 401k because he wants to avoid discrimination testing that would limit his contribution amount if the employees didn’t participate. By choosing to provide a matching contribution that is immediately 100% vested he gets to maximize his contribution even if you (the employees) don’t choose to participate. That wouldn’t be the case with a regular 401k. He basically knows he can put in k into his retirement plan on an annual basis and the cost to him is 4% of the employees wages. A small business owner may have 0k in wages. 4% of that is ,000. So, for putting in k to the employees (deductible by the way) he/she can put in 20k into her own account.

      As you can see, that’s a much better scenario for the employer than the SEP. If your employer went that way then he/she would have been limited to 4% contribution or k. Not smart…

      But, keep in mind that with a Safe Harbor plan you benefit too….you get a match and it’s immediately 100% vested AND you get that match even in your last year of employment. If you have a normal match and you quit December 15…you forfeit the match for that year. Safe Harbor plans…you get that match.

  14. QUESTION:
    My company just notified us that they will no longer be contributing to our 401K, what do you advise I do?
    Should I make a loan and open an investment acct w/ another bank, change my contribution to [FAQ-QUESTION] and stop contributing since my employer is no longer matching & has informed us that our accounts are no longer safe harbored.

    • ANSWER:
      If you can roll it over to a an IRA do so.

      http://hubpages.com/hub/Roll-your-401K-over-to-an-IRA

      No I would not contribute a dime to the plan I would start an IRA

      http://hubpages.com/hub/Start-an-IRA

      Banks are poor places for retirement accounts. Just my opinion.

  15. QUESTION:
    employer match vs employer non-vested in 401k?
    In my 401k, there is pretax, employed match, employer non-vested and safe harbor. i know pretax is what i contribute and i’m pretty sure the safe harbor is what my boss contributes regardless of my contribution. but what is the difference between employer match and non-vested? and which amounts would i not get if i left the company?

    • ANSWER:
      non-vested is employer match that you do not yet own. You would not receive it if you left the company.

  16. QUESTION:
    Can anyone explain how the contributions under IRC Section 415(c)(1)(A) are treated?
    The question is: In a Safe Harbor 401k, the regular employee deferral limit of ,500 plus the over 50 ,000 catch-up contribution would allow elective deferral of 20,500. Plus, if the HCE is making 0k, another ,000 of matching contributions would be allowed for a total of ,500. However, under IRC Section 415(c)(1)(A) the total amount contributed is limited to ,000 for 2008 plus the ,000 catch-up for over 50 for a total of ,000. Where does the extra ,500 come from (51,000-28,500)? Is it an employee or employer contribution and is it tax deductible?

    • ANSWER:
      It would be an employer contribution. Employers can make multiple types of contributions to a plan, not just the safe harbor. Also, an employer could have a second plan in which they make a contribution, a percent of the employees compensation, for example. All of these contributions combined cannot exceed the ,000.

      Yes they are tax deductible to the employer and the employee until withdrawn from the plan.

  17. QUESTION:
    What does this 401k stuff mean?
    “An employer matching contribution is made on a per pay period basis based on the amount of the employee’s pre-tax and/or after-tax Roth contributions. The Safe Harbor match is dollar for dollar up to the first 3% of the employee deferrals and 50 cents on the 4th and 5th % of employee deferrals, for a maximum 4% match with immediate vesting.”

    So, I can choose what percentage of my paycheck to invest. How will it be matched?

    • ANSWER:
      Go for the match up to the 5. After that you start
      a ROTH IRA with any Mutual fund company.
      This will give you a good retirement.
      Split your investments into 70% stock, 25% bond
      and 5% cash

  18. QUESTION:
    Is the Partnership’s Matching 401K for the Partners an expense for the Partnership?
    I was under the impression that all Partner 401K contributions were classified to the partner’s capital account. However, I heard a contrasting view that the company matching portion or safe harbor match would be considered a guaranteed payment for the partnership.

    So, my question is – is the company matching percentage of a 401K for the partners in a partnership an expense as a guaranteed payment? Or, is it as I thought it was, and an “Other Deduction” like the partner’s deferral on box 13, Form K-1?

    Thanks in advance for your responses.

    Mike

    • ANSWER:
      It wouldn’t be a guaranteed payments–GPs are income to the partner.

      According to publicatin 560, the partnership is treated as the employer to the partner for this one purpose only.

  19. QUESTION:
    What will happen to my 401(k)?
    My company used a traditional 401(k) but now they’re switching to a Safe-Harbor 401(k). Since both plan types have pretax withdraws will I be able to roll the traditional into the safe-harbor? Or will I be stuck with 2 separate 401k plans?
    CJ – Thanks for the great info. I do have another question: http://answers.yahoo.com/question/index?qid=20090629172109AAZBstE

    • ANSWER:
      Your 401k balance will automatically transfer if it needs to transfer at all. The difference between a traditional 401k and a safe harbor is just in the plan documents. It is most likely that your employer just changed the plan documents and not the plan itself. Safe harbor plans are usually used when the company is not passing the testing requirements or when the highly compensated employees want to put more money into the plan. If you are not a highly compensated employee it would have little effect on you except that the it is probably now a 4% dollar for dollar match. Which could be good or bad depending on what it use to be. Let me know if you have any questions.