Safe Harbor 401(k) Non-elective Contribution
Through the last half of 2008, it became clear that numerous employers, who never fathomed that they might have trouble funding a guaranteed safe harbor non-elective contribution (NEC), were having difficulty meeting their obligation. Here is a suggestion for plans completing the EGTRRA restatement for a safe harbor 401(k) plan. If a plan is using the guaranteed safe harbor non-elective contribution (3 percent or more), we suggest using the flexible safe harbor non-elective contribution (3% or more) instead.
Guaranteed NEC. When safe harbor plans were first introduced, the guaranteed NEC was often chosen. Now, many employers are seeking a way to get out of the guaranteed NEC. Unfortunately, other than terminating the entire 401(k) plan, there is no way out during the current plan year. The provision can be amended out of the plan document for the following plan year, but it must be amended before that year begins.
Flexible NEC.
The flexible safe harbor NEC can help employers avoid all these issues. With a flexible NEC, employers do not have to decide whether to make a contribution until December 1 of the year for which the contribution is to be made, after preliminary tests are completed. The employer provides a flexible notice informing employees that a contribution may be made the following year. The next year's flexible notice can be used to indicate whether a contribution will be made for the year and announce that a contribution may be made in the subsequent year. ADP/ACP testing will be required in any year the contribution is not made.
Another Option.
Instead of providing either a guaranteed or flexible NEC, the employer could choose to amend the plan for the next year to provide for a basic or enhanced safe harbor matching contribution. Safe harbor matching contributions may be stopped during the plan year, provided that:
- The plan document is amended to remove the provision
- A notice is sent to employees 30 days in advance stating that the safe harbor matching contribution is being stopped, during which time the employees should have the right to change their deferral amount
- The contribution is actually funded up to the specified date
- ADP/ACP testing is done for the year
