3773 / What are the requirements for a 401(k) safe harbor plan?

Editor’s Note: Prior to the SECURE Act 2.0, business owners could not change from a SIMPLE IRA to a safe harbor 401(k) before the end of the year. By November 2, the employer was required to provide notice of the switch to employees. The formal termination date was always December 31, and the 401(k) start date was January 1. SECURE 2.0 relaxed the rules so that employers can terminate a SIMPLE IRA mid-year and replace it with a safe harbor 401(k). Pursuant to IRS guidance, the employer must take formal written action and specify the termination date. Employees must be given a 30-day notice before the termination date. The notice must tell them that no salary reductions to the SIMPLE IRA will be made based on compensation paid after the termination date. The employer must make matching contributions attributable to employee compensation earned through the termination date.  During the year of transition, the total amount contributed as salary reduction contributions under the terminated SIMPLE IRA plan and as elective contributions under the safe harbor section 401(k) plan cannot exceed the weighted average of the salary reduction contribution and elective contribution limits for each of those plans (based on how many of the 365 days in the transition year each plan was in effect).

The IRC requires that deferrals, matching, and after-tax employee contributions to 401(k) or 401(m) plans satisfy certain nondiscrimination tests. A plan that is designed to meet certain safe harbors is deemed to have met those testing requirements. These tests are referred to as the ADP test for salary deferrals and the ACP test for employee after-tax and matching employer contributions. The requirements for meeting the safe harbors of 401(k) and 401(m) plans include specific plan provisions that generally require a fully vested employer contribution, one or more advance notice requirements (but see the Editor’s Note below), and certain restrictions on the level of discretionary matching contributions.

A plan may be designed to satisfy safe harbors for deferrals but not for the matching employer contribution.

The safe harbor plan requirements prohibit placing restrictions on a participant’s right to receive the match or 3 percent of pay employer contribution. Thus, the contribution must be given to employees who terminate employment in the plan year ( Q 3802, Q 3804). The safe harbor does not eliminate the requirement of ACP testing for employee after-tax contributions.¹ In addition, 401(k) plans that meet the safe harbor of 401(k) and 401(m) generally are exempt from the top-heavy requirements ( Q 3916 to Q 3922), except as explained below.²

Regulations permit the required safe harbor contributions to be made to the 401(k) plan or other defined contribution plans of the employer.³ Except for the provisions described below, a safe harbor plan generally is subject to the same qualification requirements of IRC Section 401(a) as a traditional 401(k) plan.

The fact that a plan is a safe harbor 401(k) does not prevent certain lower income taxpayers from being eligible to claim the saver’s credit for elective deferrals ( Q 3648).

The dollar limit on elective deferrals to a safe harbor plan is the same as for a traditional 401(k) plan ( Q 3760).

A safe harbor plan generally may also permit catch-up contributions by participants who are at least age 50 by the end of the plan year.⁴ The limit on catch-up contributions ( Q 3761) to safe harbor plans is calculated in the same manner as if made to a nonsafe harbor 401(k) plan.⁵ The dollar limit for salary deferrals is $23,500 in 2025, $23,000 in 2024, $22,500 in 2023, $20,500 in 2022, $19,500 in 2020-2021, $19,000 in 2019) and the catch-up contribution limit is $7,500 for 2023-2025 ($6,500 in 2020-2022).⁶

Safe harbor 401(k) and 401(m) plans generally are exempt from the top-heavy requirements; where additional employer contributions are made (e.g., profit sharing), that exemption is lost.⁷

Editor’s Note: Under the SECURE Act, beginning in tax years after December 31, 2019, a plan sponsor may switch an existing 401(k) plan to a safe harbor 401(k) with nonelective contributions at any time prior to 30 days before the close of a plan year. An amendment to do this can even be made later than this deadline if it provides (i) a nonelective contribution of at least 4 percent of compensation (versus 3 percent) for all eligible employees for the plan year; and (ii) the plan is amended no later than the last day for distributing plan excess contributions for the plan year, which is the close of the following plan year.

The SECURE Act also eliminates the safe harbor notice requirement for nonelective contributions. However, it retains the requirement to allow employees to make or change a deferral election at least once per year.⁸ In addition, there is a new tax credit for certain small employers that include an automatic enrollment feature (a QACA) in their plan, whether new or existing.⁹ See Q 3776.