Maybe HR professionals struggle getting senior management engaged in their company’s 401k plan. Without their engagement, it’s close to impossible to make dramatics improvements. One way to guarantee non-engagement is to fail discrimination testing forcing highly compensated executives (HCEs) to give back money and pay additional taxes because the plan failed testing. A 401k plan administrator attending a TPSU program at Queens in Charlotte explains how safe harbor made her life simple and made senior management very happy.
401k plans are complicated – lots of rules and penalties which can be overwhelming and time consuming. To avoid testing failures, more and more plans are turning to safe harbor plans. Not only does it keep senior management more engaged in the plan, I avoids vesting issues while simplifying administration.
There are several safe harbor plans including:
- Traditional Match – 3% of 100% and 50% of next 2% (4%)
- Non-elective Match – 3% of 100% whether the eligible participant contributes or not (3%)
- QACA Match – for plans that auto-enroll, 1% of 100% and 50% of 5% (3.5%
There are others ways to avoid testing failure including:
- Limit the classification of HCE to the top 20%
- Use current year rather than prior year results for testing
- Allow more liberal eligibility requirements than the law requires and test the participants that meet the plan’s eligibility requirements, but not the legal limits, separately
Another option is to close participation in a plan to job categories that have relatively low participation.
But the simplest way to avoid failure is to create a safe harbor plan even though it might cost the company more. But after senior management has to pay more in taxes one year, it will be easier to convince them that safe harbor plans are well worth the money.
