Plan design is critical to a successful retirement plan. Not all qualified plans are created equal with the amount of alternatives seemingly endless. Each alternative has it’s own benefits and drawbacks.

Safe harbor plan design is one of the best developments in qualified plans in the last 15 years. It’s win win because the 100% vested contributions to plan participants allows the plan to get a free pass on ADP (deferral discrimination tests), ACP (matching contribution tests, if contribution made), and the Top Heavy test (making sure plan doesn’t substantially benefit Key Employees). In addition, if the plan sponsor elects the 3% non-elective safe harbor (3% of compensation contribution to participants, regardless of whether they defer or not), that 3% can also be used to satisfy the minimum gateway contribution to non-highly compensated employees in a cross-tested allocation  (which means that highly compensated employees can get up to 9% of compensation in this type of profit sharingcontribution).That being said, a plan sponsor has to be advised by their third party administration firm (TPA) and/or ERISA attorney why a safe harbor plan design might be a good idea. Here are some clues as to when plans need to go this route:

1. Plan has failed the ADP, or ACP, or Top Heavy Test (or all of them) in the past 1-2 years.
2. Plan has come close to failing the above tests in the plan year.
3. Demographically, plan has non-highly compensated employees that defer at a very low percentage.
4. Demographically, plan has a large group of highly compensated employees such as a professional practice (law firm, accounting, and medical practice).
5. Plan already uses a cross-tested, new comparability allocation for their profit sharing contribution.

The safe harbor plan is always worth investigating. It is a win win for the employer wishing to contribute more to their personal account and for the employee needing more savings.

Please comment or call to discuss how the safe harbor plan would benefit your company.