October 1st: Your Safe Harbor 401(k) Deadline

The deadline to adopt a Safe Harbor 401(k) plan for the current plan year is October 1st. That means it’s time for your clients to act if they want to take advantage of this option. But why is there a deadline in the first place and what are your clients’ responsibilities leading up to plan implementation? Let’s break it all down!    

Key Takeaways:

• Safe Harbor 401(k) plans have deadlines to give employers time to notify employees, set up the plan, and avoid certain compliance tests.
• Employers must give notice to employees 30 to 90 days before the start of the plan.
• Safe Harbor 401(k) plans require employers to contribute to participant accounts.  
• These plans are exempt from certain compliance tests because they meet IRS requirements; one being the plan is effective for at least 3 months in a plan year.  

Why the October 1^st deadline?

A Safe Harbor 401(k) plan must be active for at least 3 months of the plan year to give participants enough time to make deferrals and receive required employer contributions. This makes October 1^st the deadline for setting up a new plan.  However, businesses with existing retirement plans that want to switch to a Safe Harbor for the following year can do so after October 1^st.  

Luckily for business owners looking to make the switch for the current plan year, ePlan Services can set up new Safe Harbor 401(k) plans in as little as 15 minutes and fund them within 24 hours. As a forward-thinking advisor, you can take the lead during Safe Harbor season—July-August— by reminding clients that October 1^st is the cutoff date to put a new Safe Harbor plan in place.

Participant notice requirements:

Before a new Safe Harbor 401(k) plan can be implemented, plan sponsors must send notices to employees 30 to 90 days before the start of the plan year. In the case of a plan that begins on October 1^st, the latest notice employees can receive is on September 1^st of that year.  That means you actually have one month less than you might have expected to close a sale.

If you wait until late September to introduce this plan design, it’s already too late because the mandatory notice window will have passed. So, while employers have until October 1^st to adopt a plan for the current year, you only have until September 1^st to sell Safe Harbor plans to ensure your clients meet the notice requirements.

Mandatory employer contributions:

Safe Harbor 401(k) plans require employers to choose one of three contribution formulas. These contributions are mandatory and generally must be immediately 100% vested, unless you choose a Qualified Automatic Contribution Arrangement, (QACA), plan type, which allows for 2-year cliff vesting. This tends to be a major selling point for businesses that value employee retention.

The three employer match formulas are as follows:

• Basic match— Participants must first contribute their own funds. Then, the employer matches 100% of the first 3% of the employee’s contributions, then 50% of the next 2%. This formula is one of the most used.
• Non-elective contribution — Employees don’t need to contribute, but employers must contribute at least 3% of all eligible participants’ salaries.
• Enhanced Match— Similar to the basic match, participants are required to fund their accounts. Employers are also required to make matching contributions, no less than the basic match. This means they can match up to 100% of the first 4%, 5%, or even 6% of all participants’ deferrals. This option can serve as a strong talent recruitment tool.

Choosing the right match formula takes advanced planning and budgeting, especially as the October 1^st deadline looms. To qualify as a Safe Harbor plan, it must satisfy the 3-month rule with accounts fully funded or risk losing the compliance testing exemption. Employers have to choose a match formula and contribute to accounts by or before October, providing an opportunity for financial advisors to hasten deals by recommending a course of action.

Compliance test exemption:

The main appeal of Safe Harbor 401(k) plans is that they typically satisfy certain non-discrimination tests: Actual Deferral Percentage (ADP), Actual Contribution Percentage (ACP), and top-heavy testing. These tests ensure that the plan doesn’t disproportionately favor owners or high-income individuals.

Failing ADP/ACP tests means business owners must either issue corrective distributions to HCEs or make additional contributions to non-HCE accounts; failing the top heavy test requires a baseline contribution to non-key employees. These corrections can be expensive and time-consuming. If your client has sought your input to help them navigate these tests, or their effects, time is of the essence should you decide to transition them to a Safe Harbor plan.

Conclusion:

A Safe Harbor 401(k) can make retirement planning much easier for your clients. But successful implementation of a new plan takes time and proper planning. That’s why business owners have a deadline of October 1st to adopt a Safe Harbor 401(k) plan for the current plan year. Don’t let them miss out on their chance to provide a valuable retirement savings plan to their employees while also avoiding burdensome compliance testing.