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Safe Harbor 401k Plan Considerations During the COVID-19 Outbreak

Since the passing of the Small Business Job Protection Act of 1996, many businesses across the United States have adopted the design-based safe harbor methods for satisfying nondiscrimination testing, or as it’s commonly known today, the Safe Harbor 401(k) plan.

The Safe Harbor plan design has provided many businesses that were willing to provide minimum levels of employer contributions and accelerated vesting schedules, the ability to easily satisfy complicated nondiscrimination testing requirements that historically plagued plans with low participation.

Plans that deployed the safe harbor provisions were deemed to pass nondiscrimination testing and, in most cases, granted an exemption from satisfying the top-heavy testing requirements. Organizations with large populations of highly compensated employees and or low participation rates enjoyed the ability to allow HCE’s to defer to maximum levels without fear of a corrective distribution at year-end.

In today’s economic climate, the required annual safe harbor contribution has very quickly come into the crosshairs for many organizations looking to reduce expenses during these turbulent times.

In 2013, the IRS issued its final regulations on mid-year suspensions of Safe Harbor contribution and, in some cases, loosened the restrictions on organizations wishing to remove or reduce this contribution. The final regulations also provided uniform requirements for both Safe Harbor Matching contributions and Safe Harbor Non-elective contributions.

A plan sponsor of a Safe Harbor plan can typically suspend their contributions mid-year under either the following conditions:

  • The Safe Harbor notice provided to eligible participants contained language describing the plan sponsors right to suspend, modify, or reduce the safe harbor match mid-year upon proper notice.


  • The business is operating at an “economic loss” as described in IRC 412(c)(2)(D)

If in the event a plan sponsor’s Safe Harbor notice contained the language necessary to perform a mid-year suspension of the employer contribution, a supplemental notice must be provided to eligible participants no later than 30 days in advance of the targeted suspension date.

Before taking steps to remove the Safe Harbor contributions, careful consideration should be given to the ramifications of losing safe harbor status mid-year. The plan must satisfy the traditional ADP/ACP nondiscrimination testing common in non-safe harbor plans, which may or may not result in refunded contributions to the organization’s highly compensated employees. Sponsors should also consider the impact on the plans top-heavy status in lieu of the Safe Harbor designation.

Is Safe Harbor relief on the way?

In a March 24 letter to the Treasury, the American Retirement Association requested relief for Safe Harbor plan sponsors, among other retirement-related requests. Specific to Safe Harbor plans, the ARA requested:

    • Safe Harbor plans be allowed to reduce or stop Safe Harbor contributions without 30-day notice requirement
      • Plan sponsors would be required to notify employees within 90 days of the suspension
    • Amendments may be adopted no later than the last day of the plan year
    • Plans would retain their Safe Harbor status through the plan year if:
      • The change is due to a substantial business hardship; and
      • The condition that no HCE may make elective deferrals through the end of the plan year

If these relief provisions are adopted, a new layer of considerations would be required by Safe Harbor Plan sponsors as well as additional clarity on these proposed relief measures from the Internal Revenue Service.

As with all proposed qualified plan changes, please consult your plan’s advisor & ERISA counsel prior to taking any action on plan design changes.

For more information on the important steps businesses should take in the wake of the coronavirus, visit our OneDigital Coronavirus Advisory Hub, or reach out to your local OneDigital advisory team.

Investment Advice offered through Resources Investment Advisors LLC, (d/b/a OneDigital Investment Advisors) an SEC-registered investment adviser and wholly owned subsidiary of OneDigital.