New Rules for Adoption of a Safe Harbor Feature in a 401k Plan

By December 9, 2020No Comments

You may be surprised to know that it is not too late to add a “safe harbor” (“SH”) feature to a 401k Plan, retroactively effective as of the beginning of 2020. In fact, a SH feature can be added in 2021, effective for 2020. This was not allowed before this year.

In December 2019, the SECURE Act made several significant changes impacting longstanding retirement plan rules. One such change loosened the restrictions on timing of adoption for one of the 401k Plan safe harbor alternatives.

Previously, an employer generally had to decide at last 30 days before the beginning of a year, whether to have the SH feature in effect for the next year.

Under the new rules, a retroactive 3% “nonelective” safe harbor – nonelective means that eligible employees receive the employer’s 3%-of-pay SH contribution whether or not the employee elects to make a payroll-deducted 401k deferral contribution – can be added as late as the 30th day before the end of the year. That deadline is extended into the next year if the employer’s SH contribution is 4% of pay, rather than 3% of pay.

These new rules provide an opportunity to retroactively “fix” traditional non-safe-harbor 401k Plans that fail the post-year-end IRS nondiscrimination test, known as the ADP Test. This test generally limits the employee 401k deferral contributions made by business owners and by employees who earn more than $130,000 per year. These individuals, referred to as “highly compensated employees” or HCEs, have their average 401k deferral contributions (as a group) limited to slightly more than the average 401k deferral contributions for the group of non-HCEs, for a traditional 401k Plan.

Failure of the ADP Test frequently results in some or all of the HCEs receiving a refund of contributions. That refund is income-taxed in the year received. More importantly, the tax-deferred retirement savings of the impacted HCEs is reduced.

Under the new rules, after the ADP Test is completed, a decision can be made to retroactively add the 4% SH contribution feature to the 401k Plan for the prior year. Doing so generally eliminates the need to make refunds.

For employers who consider a post-year-end decision to make profit sharing contributions, in most cases, some of the profit sharing dollars can be “traded-off” or replaced by this SH contribution.

ACSI ( or is available to help you learn more about the different safe harbor alternatives.

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