The Safe Harbor Solution

You worked hard, rose to the top, and you now own your own business. You’re a focused professional who plans ahead to avoid surprises. There’s no sailing like smooth sailing. But, when you did your advance tax planning for 2017, did you remember to include the taxable income you received as a result of your 401(k) refund? It’s an unfortunate result of some IRS nondiscrimination testing. The deferral opportunities for you (and your highly compensated employees) are entirely dependent on what your rank-and-file employees are contributing. If your employees are, on average, deferring only 2% of their pay, you’re limited to around 4% of yours. How’s that for a simplified version of the Test?
Generally speaking, if the test fails, you and your highly compensated staff get a refund check, and it’s not the good kind. Frustrating, right? Aren’t your 401(k) deferrals supposed to lessen your tax burden?! By adding a safe harbor provision to your plan, you can essentially ignore the test and defer the legal maximum in exchange for making specific contributions for your employees. There are two main Safe Harbor options – one is a match for those participants who actively defer to the plan, and the other is an across-the-board allocation to all eligible employees. The most common match formula is dollar-for-dollar up to 4% of compensation which, to some employers, seems like a lot of money. But according to “Plan Sponsor Magazine, August 2017,” the most common match formula is 50% of the first 6% of salary deferred. This shows a willingness among most plan sponsors to match up to 3% of their employees’ wages. So for an additional 1%, you can avoid the costly and frustrating refund. Another Safe Harbor option is an across-the-board contribution to all of your eligible employees – most commonly it’s 3% of compensation. This is a particular favorite for those who regularly make a profit sharing contribution since that allocation is often in excess of 3%. In those cases, except for the initial amendment, the Safe Harbor adds no additional cost to the plan. Another test that can be satisfied via the use of a Safe Harbor is the Top Heavy Test. A plan is Top Heavy if at least 60% of the plan assets belong to the “Key” employees. Now, don’t get me wrong. Being Top Heavy isn’t a bad thing. It means the plan is working well for you while giving a meaningful benefit to your employees which is a good thing! But what happens when your plan is Top Heavy? Mandatory contribution requirement kicks in the minute a key employee defers just $1 into the plan! The great thing about the Safe Harbor is that it satisfies the requirement for those Top Heavy plans. Of course, specific rules apply and one size does not fit all. So, really, making your plan a Safe Harbor 401(k) is killing two birds with one stone. To be clear, I don’t condone the killing of birds with stones; but I do advocate for making sure you benefit from your own 401(k) plan! What’s the catch, you ask? Participants are immediately vested in their Safe Harbor allocation and, once the plan document is amended to include this provision, it becomes a mandatory contribution. But remember employer contributions are tax deductible, so even the “catch” can be beneficial!

Upcoming Deadlines

10/15/2017 Extended 5500 filing deadline for 12/31/2016 PYE
10/26/2017 Workshop for Day-to-Day Plan Administrator (Full)
10/31/2017 5500 Filing deadline for 3/31/2017 PYE
11/09/2017 Workshop for Day-to-Day Plan Administrator (Full)
11/15/2017 Extended 5500 filing deadline for 1/31/2017 PYE
11/30/2017 Safe Harbor Notices for 12/31/2017 PYE
12/15/2017 Extended 5500 filing deadline for 2/28/2017 PYE
Safe Harbor Solution


For calendar year end plans, amendment deadline is November 15th

  • 1. Contact me at jtucker@trco.com to get the conversation started.
  • 2. We’ll reach out to your financial advisor and let them know you’re considering a plan design change.
  • 3. When you decide to make the change, we’ll amend your plan to put the safe harbor in place for the 2018 plan year end.
  • **For off-calendar year end plans, the amendment deadline is 45 days before your current plan year end**