“Safe harbor” 401(k) plans

These plans are exempt from the actual deferral percentage (ADP) test for employee elective deferrals, and the actual contribution percentage (ACP) test for employer matching contributions.

These tests, required for 401(k) plans that are not a safe harbor, are designed to prevent discrimination in favor of highly paid employees.

To take advantage of these test exemptions, a safe harbor plan must, with few exceptions, meet required contribution levels. Plan sponsors must provide a “safe harbor notice” to all participants, and plan provisions must remain in effect for a 12-month period (this period does not have to be a calendar year).

Until now, the requirement for plan provisions to remain in effect for a 12-month period limited changes that could be made mid-year. For example, you could not during the plan year:

  • adopt a short plan year or make any other change to the plan year;
  • adopt safe harbor status on or after the beginning of the plan year; or
  • change the plan’s status from safe harbor to no safe harbor or the reverse.

Before the recent IRS notice, midyear changes that were permitted were the result of changes in the law. For example, the Supreme Court Windsor decision allowed plan sponsors to make mid-year changes to cover same-sex spouses.

Even when plan sponsors wanted to change how and when a company sent its contributions to employee 401(k)s, the company could have problems complying because of the mid-year restrictions.

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