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.