It seems like there is always an ERISA deadline. Here’s one coming up on December 1. It’s the due date for a calendar year plan to distribute a safe harbor notice for 2008. If the notice is timely provided and other conditions met (discussed below), a 401(k) plan is treated as satisfying the discrimination testing. The result, then, is to avoid returning excess contributions to the Highly Compensated Employees (HCEs).

An employer can satisfy the safe harbor requirement in one of two ways. 

  1. Contribute at least 3% or more of compensation to all eligible employees. Generally, the 3% contribution must be provided to all employees eligible to make elective deferrals to the plan even if they make no contributions themselves.
  2. Contribute a matching contribution equal to 100% of the first 3% of elective contributions and 50% of the next 2%. Thus, if every employee contributes at least 5% of compensation, the maximum employer match is 4% of total compensation.

Here is some of the fine print: 

  • No allocation requirement may be imposed, such as a 1,000 hour or last-day requirement.
  • The contribution must be 100% vested.
  • The 3% contribution can also be used to satisfy Top Heavy minimum contribution and can be used towards satisfying the cross-testing gateway for new comparability plans.
  • The matching contribution can used to satisfy a Top Heavy minimum contribution.
  • HCEs can also receive a safe harbor contribution.

Automatic enrollment plans wanting to use a safe harbor have another set of requirements which is a topic for another day.

Safe harbor plans are not for every employer. The decision to use the safe harbor method should be based on the employer’s objections and plan demographics.