Safe Harbor is Great, but…

Published on October 23, 2015

Safe Harbor (SH) plans are popular for 3 reasons:

  1. If your client has ever complained about getting a check back at the end of the year you know how frustrating it is to not be able to defer the full $18,000 a year or $24,000 if over 50 years old. SH plans ensure all participants are able to defer up to the max allowable each year (no non-discrimination testing). 
  2. Generally, SH eliminates any possibility of the company having to make an unexpected mandatory contribution due to top heavy issues with the plan. 
  3. SH formulas and vesting are predetermined and, therefore, less complicated.  

But SH plans also restrict some of the mid-year changes a plan might want to make.

Here’s an example: A plan sponsor receives the 2014 reporting in spring 2015 and remembers they would like to adjust the profit-sharing formula for 2015. Unfortunately, it’s too late. SH plans are required to make changes to the profit-sharing formula before the start of the plan year. Advisors need to check in with their client now or wait until 2017.  

Here’s a quick guide to help you track which changes need to be made before December:  

List 1: Changes that can be made at any time:      

  • Terminate a SH Plan
  • Reduce or eliminate the SH match
  • Add a Roth deferral feature
  • Add hardship distributions
  • Expand coverage to allow additional employees to participate 
  • Change trustee for SH Plan

List 2:  Examples of changes that must be made prior to start of plan year:

  • Change profit-sharing formula
  • Change eligibility
  • Add loans
  • Exclude compensation (like bonuses)
  • Change when participants can make deferral changes
  • Add a SH feature mid-year

Tip 1: Act in the next 30 days because plans must be amended by Dec. 1. 

Review List 2 with your client/s to see if any changes are needed. If changes are needed, give your TPA a call so they can update the document before December.   

Also, if your plan is not a Safe Harbor Plan, you’ll need to amend the plan now to make it a SH plan, and distribute notices to employees by Dec. 1. 

Tip 2:  Print and keep this list handy.

Want an easy way to keep track of what you can and can’t do?  Print a copy of this blog and keep it handy so you can refer back to it. 

If you have any questions about a particular plan, contact me or my team so we can help