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Introducing Safe Harbor

There are ways to establish a 401(k) plan and avoid many of the annual compliance tests. It’s called the Safe Harbor Project. This type of plan automatically satisfies the aforementioned non-discrimination rule. Therefore, ADP and ACP tests do not apply and the amount an HCE can contribute to the plan is not limited by what the rest of the employee contributes.

Safe harbor plans are also exempt from the top-heavy test unless the employer makes contributions other than the mandatory safe harbor match or the non-selective contributions described in the next section. For example, for profit share contributions, you may need to perform a top-heavy test. If the test shows the plan is top-heavy, the employer may be asked to make additional contributions to the plan.

In exchange for being relieved of much of the testing and other administrative burden, employers who choose a Safe Harbor 401(k) make an annual contribution on behalf of their employees to support their choice of 401(k) design. Other requirements must be followed as appropriate.

Safe Harbor 401(k) Design Choices

A Safe Harbor 401(k) can be designed in two ways: a traditional Safe Harbor 401(k) and a Qualified Automatic Contribution Agreement (QACA). Both sidestep the need for testing and require employers to contribute on behalf of participants. However, some key differences are listed in the table.

Legacy Safe Harbor 401(k) vs. Qualified Automatic Contribution Agreement (QACA)

	Legacy Safe Harbor 401(k)	Qualified Automatic Contribution Plan (ACA)
admission	Employees can join the plan or you can join. In any case, you should contribute to the plan according to one of the following formulas:	Eligible employees are automatically enrolled in the plan and must deduct at least 3% of their salary to contribute to the plan, unless the employee chooses not to participate. Each year thereafter, the employee’s contributions will automatically increase by at least 1% until they reach at least 6%, although the plan may stipulate that these automatic increases will be capped at 15%. Additionally, you must contribute to the plan according to one of the following formulas:
contribution	Matching contribution The employer matches 100% of the first 3% of salary contributed by the employee with 50% of the next 2% of the employee’s contribution. example If an employee contributes more than 5% of their salary, you must make a matching contribution of 4%. non-selective donation Contribute 3% of the salary of all eligible employees (even those who have not contributed to the plan).	Matching contribution The employer matches 100% of the first 1% of salary that the employee contributes to the plan and an additional 50% of the next 5% that the employee contributes. example If an employee contributes more than 6% of their salary, you must make a matching contribution of 3.5%. non-selective donation Contribute 3% of the salary of all eligible employees (even those who have not contributed to the plan).
Vesting	Contributions to Safe Harbor are always fully vested, whether matched or not.	Contributions to Safe Harbor, whether matched or not, must be fully vested when the employee completes two years of service.

Which safe harbor design is right for your company?

Consider the following important questions when choosing between the legacy Safe Harbor 401(k) and QACA:

• Immediate or delayed vesting?
  Under the traditional Safe Harbor 401(k), employer contributions are fully vested when made. However, at QACA, these contributions may be subject to his two-year vesting schedule. Employees who leave before reaching their second year of service will lose the amount in the Employer Contribution Account. Forfeited funds can be used to offset future required employer contributions.
• Auto-registration or opt-in?
  Automatically enrolling employees in a 401(k) has been shown to be an effective way for employees to build retirement savings. Auto-registration is optional in the traditional Safe His Harbor design, but mandatory in QACA.
• Matching or non-selective contributions?
  With the non-selective contribution option, a 3% contribution is made to all eligible employees, including those who do not contribute their own money to the plan. With the Matching Donations option, donations are made only to employees who donate themselves. Since the basic matching formulas of the traditional Safe Harbor 401(k) and QACA are different, the potential costs will vary depending on the number and percentage of contributing employees.

  For example, if you choose a traditional safe harbor design and all eligible employees contribute at least 5% of their salary, the matching cost will be 4% of their salary. However, in common plans, some employees opt out or choose to contribute less than 5%, so the cost is usually less than 4%.

  On the other hand, if you choose the QACA design and all eligible employees contribute at least 6% of their salary, the matching cost will be 3.5% of their salary.

Safe Harbor 401(k) deadline

If you are considering establishing a Safe Harbor 401(k), you should be aware of some important deadlines.

• New plan — During the first year of the plan, employees must be given the opportunity to contribute for at least three months. Therefore, for a 401(k) plan that operates in a calendar year (like most plans), the plan must come into effect by his October 1st.

  If you choose to design a QACA or make a matching donation, you must notify your employees at least 30 to 90 days before the plan’s effective date. Each year thereafter, notice must be filed between he October 1st and he December 1st.

• existing plan — Existing standard 401(k) can be modified to add safe harbor functionality. If you make a 3% non-selective donation, you may amend your plan for that calendar year to add this feature by November 30th of that calendar year.

  Due to a recent legislative change, you can wait until the end of the following year to make a 4% contribution instead of a 3% non-selective contribution. Plans can be amended to add Safe Harbor matches only at the beginning of the calendar year. In that case, the employee must give notice at least 30 days before the start of the year.

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Everyday 401(k) by JP Morgan was built with you and your employees in mind. If you are interested in establishing a retirement plan for your business and would like to speak with a retirement planning specialist, please stop by your local Chase branch, complete this reception form, or call 833-JPM-401K. .

For informational/educational purposes only: The views expressed in this article may differ from those of other JP Morgan Chase & Co employees and departments. The views and strategies expressed may not be appropriate for everyone. Information has been obtained from sources believed to be reliable, but JP Morgan Chase & Co. or its affiliates and/or subsidiaries do not warrant its completeness or accuracy. Carefully consider your needs and objectives and consult the appropriate professional before making a decision. Forecasts and past performance are no guarantee of future results.

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