year, unless the employer amends the plan and removes the provision before the start of the new plan year. The 3% is 100% employee vested.
The other type of 401k safe-harbor design is a matching contribu¬tion. There are two options from which to choose, the basic or the enhanced match. The basic safe-harbor matching contribution is defined as a 100% match on the first 3% deferred and a 50% match on deferrals between 3% and 5%. Alternatively, the employer may choose an enhanced matching formula equal to at least the amount of the basic match; for example, 100% of the first 4% deferred.
Timing the 401k Safe Harbor Adoption
Safe-harbor 401(k) plan provisions may not be added to an existing 401(k) plan in the middle of a plan year. Instead, the 401k plan must be timely amended to add the safe-harbor 401(k) provisions for the next plan year.
In an exception to the timing requirements for giving the safe harbor notice, a new 401(k) may adopt a safe-harbor design at the same time that the plan is established, assuming the notice is provided simultaneously. There must be at least 3 months remaining in the plan year to make elective deferrals for a plan to use this provision. For example: An existing profit-sharing plan that is amended to add a 401k feature is eligible to use this rule.
Further, a brand new business entity establishing a new 401k plan may have as short as a one-month initial plan year (assuming that the initial year is then followed by the normal 12 month year).
401k Safe Harbor Conditions
The sponsor of a 401k plan using a guaranteed 3% contribution must make that contribution regardless of its subsequent financial condition during that plan year. However, an employer may stop making safe-harbor matching contributions by providing a notice to the employees. This notice must be given at least 30 days before the contributions are to be stopped. If an employer stops safe-harbor matching contributions before the plan year is completed, the ADP and ACP tests must be preformed for the entire plan year.
Investment representatives hooking up the annual plan limits with a “Safe Harbor” plan design will end up providing their clients with three benefits---Higher tax deferred contribution levels for the company owners and highly compensated,--- non discrimination testing issues are eliminated--- and any top heavy issues are satisfied as well. -- That’s a triple play.
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