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Safe Harbor 401(k) Notification Requirements

Terrence M. Burns, CPA, MSA  I  Supervisor

Safe harbor 401(k) plans are similar to traditional 401(k) plans in many ways, but also have significant differences. Any size company can adopt a safe harbor plan and they are a preferred option for plans that have trouble passing the ADP or ACP testing; or plans that are required to make top heavy minimum contributions. A few of the ways in which safe harbor 401(k) plans vary from traditional 401(k) plans are:

  • Safe harbor employer contributions are fully vested when made.
  • Safe harbor plans are not subject to the nondiscrimination tests that traditional 401(k) plans face.
  • Safe harbor plans are exempt from the top-heavy rules of section 416 of the Internal Revenue Code if they do not provide additional contributions in that plan year.
  • Safe harbor plans have to meet certain notice requirements, including content and timing obligations.

The focus of this article will be on notice requirements. Failure to meet the safe harbor notice requirement is a common compliance error, and the Internal Revenue Service has been concentrating its resources on such errors through 401(k) questionnaires. The primary purpose of the notice requirement is to ensure that the plan sponsor notifies employees of their rights and obligations under the plan on an annual basis, and communicates such accurately, and in a manner that can be understood by the average eligible employee. The notification requirement is best understood when broken into two sub-requirements: minimum content and timing.

Minimum Content Requirement

According to Income Tax Regulations section 1.401(k)-3(d)(2), the notification must include the following information in order to satisfy the minimum content requirement:

  • The safe harbor contribution formula used in the plan.
  • Any other contributions under the plan, including any potential contributions and the circumstances in which they are made.
  • The plan to which the safe harbor contributions will be made.
  • The limits on what type and how much compensation may be deferred under the plan.
  • The process for making cash or deferred elections and the periods under the plan for making such elections.
  • Provisions regarding withdrawals and vesting applicable to plan contributions.
  • Information to assist employees in obtaining additional information about the plan. Examples of this include a copy of the summary plan description or contact information of individuals who can provide information and/or answers regarding the plan.

A notification may include additional information if the plan sponsor considers it necessary, but should at least include the information above to guarantee that the minimum content requirement is met.

Timing Requirement

In order for the notification to meet the timing requirement, the notification must be delivered within a reasonable period of time before the beginning of the plan year. According to Income Tax Regulation section 1.401(k)-3(d)(2), a reasonable period of time has been interpreted to be at least 30 days prior to the beginning of the plan year, but no more than 90 days. If an employee becomes eligible during the plan year, or within the 90 day period before the beginning of the plan year, the plan sponsor is required to notify the employee within the 90 day period before the date they become eligible.

In order to better understand the safe harbor notification requirement, plan sponsors should examine the two sub-requirements: minimum content and timing. Doing so should allow the plan sponsor to draft an effective and timely notification to all eligible employees, and ultimately satisfy the safe harbor notification requirement. For more information regarding the notification requirement for safe harbor 401(k) plans, or any of the differences highlighted above between traditional 401(k) plans and safe harbor 401(k) plans, please contact the EBP Team at EFPR Group. Resources: IRB 2005-5

Terrence M. Burns: Terrence M. Burns, CPA, MSA, is a Supervisor in EFPR Group’s Attest department.  Terrence has acquired experience in numerous industries including: manufacturing, technology, energy, not-for-profit organizations, and public companies.  He prepares and reviews financial statement audits, reviews, and compilations for a variety of clients.  Other responsibilities include: inventory observations, risk assessment, bookkeeping, Form 990’s and financial statement preparation.

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