April 30, 2020
Stopping Safe Harbor Contributions
Many employers make matching and profit sharing contributions to their 401(k) plan. These contributions help employees achieve their retirement goals and are very much appreciated. Considering these are now more difficult times, some employers may need to reduce, delay, or stop contributions.
Here are few frequently asked questions about the most common employer contribution known as a Safe Harbor contribution:
For an explanation of the retirement plan provisions in the CARES Act and who qualifies, see our article on our website at www.BenefitEquity.com/cares called “CARES Act Retirement Plan Provisions.”
Safe Harbor Contributions
There are two types of Safe Harbor Contributions. The 3% nonelective contribution known as the 3% Safe Harbor Contribution and another referred to as the Safe Harbor Match. The 3% goes to everyone eligible and the match goes to only those who defer money into he 401(k) plan. There are budgetary and compliance issues that help determine which safe harbor provision was right for each employer.
Q. Can I stop my 3% Safe Harbor Contribution or match?
A. You can stop the Safe Harbor Contribution by giving your employees a notice at least 30 days in advance of stopping contributions. The notice gives participants the opportunity to change their 401(k) deferrals. You will then have to amend your plan document. The contribution stops on the amendment effective date, which is no less than 30 days from when you delivered the notice.
Q. If I stop the Safe Harbor Contribution what is the procedure?
A. There are four steps to the process:
1. Let your administrator know you need to stop the Safe Harbor Contribution.
2. They will send you a sample resolution you can adopt indicating the effective date of the amendment.
3. A new Safe Harbor notice will be prepared for you to give to all eligible employees. BEI will send you a notice for you to distribute to all eligible employees.
4. The actual amendment does not have to be created and signed until 2022. It will be done sooner than later, but right now out attorney is working on the appropriate wording for the amendment.
Q. We make regular matching contributions that are not safe harbor. What are the rules for stopping these contributions?
A. There are no employee notices required and you can stop these contributions at any time, however, we do suggest informing your employees of this change. Most plan documents say non Safe Harbor Matches are discretionary, therefore no amendment is required.
Q. If I stop safe harbor contributions for 2020, when I can I begin the again?
A. You can amend your plan to start Safe Harbor Contributions in 2021, but remember to check with your administrator on the exact timing for your plan. Prior to the new SECURE Act law, you had to elect Safe Harbor Contributions before the beginning of the next year. This new law lets you start the 3% Safe Harbor Contributions retroactively (not for the matching safe harbor). Calendar year plans can wait well into 2021 to restart the 3% Safe Harbor Contributions.
Q. What do I need to know before I stop my safe harbor contribution?
There are two things we recommend you consider:
1. If owners or key employees have 60% of all the money in the plan, the plan is “top heavy.” This means if key employees have deferred money to the 401(k) plan, the company must give all eligible plan participants 3% of their pay as a contribution. Stopping the Safe Harbor Contribution doesn’t help.
2. By using a Safe Harbor Contribution or Match, you do not have to do nondiscrimination testing known as the ADP test. If you stop Safe Harbor Contribution at any time during the year, you must pass the ADP test for the whole year. This could mean executives may get some of their 401(k) defers returned to them.
Q. If my company makes safe harbor contributions each payroll can payments be deferred until the end of the year?
A. Most BEI plans are designed for “annual” safe harbor contributions, but many employers put their 3% or matching amount in the plan each payroll. In these instances, you can suspend the safe harbor contribution and wait until you file your tax return in 2021 to make the contribution. Keep in mind that the plan document will need to be amended if it currently says safe harbor contributions will be made each payroll.
Please contact your BEI representative for help with your retirement plan questions.
Author: Robert Gorelick, APA, Founder Benefit Equity Inc.