Safe Harbor Plan Considerations Amid Changed Circumstances

The Setting Every Community Up for Retirement Enhancement (SECURE) Act was enacted on the cusp of 2020—and before the dust even settled, new guidance and additional measures were enacted. In an ASPPA webcast, an industry expert looked at some key considerations for designed-based safe harbor 401(k) plans in the wake of SECURE’s enactment and subsequent developments. 

“The stocking stuffer from December 2019 introduced changes for retirement plan practitioners, particularly in 401(k) safe harbor designs and administration,” said ” JJ McKinney, CPC, QPA, QKA. ERPA, Principal Consultant at McKinney 10:13 Consulting, setting the table for the discussion. “The SECURE Act seemingly blazed a very quick and short trail before the world changed, which led us to confront more pressing matters,” he said, continuing, “There quickly was new legislation to sift through,” such as the Coronavirus, Aid, Relief and Economic Security (CARES) Act, and there were “changes that needed to be implemented, and new design opportunities.” 

With the SECURE Act and IRS Notice 2020-86, which McKinney said “provided some much-needed guidance” on the law and its provisions, there were a variety of changes to implement. 

QACA Escalation Cap

For instance, said McKinney, there was a big change in the qualified automatic contribution arrangement (QACA) escalation cap from 10% to 15%. In a traditional safe harbor plan without a QACA attachment as an automatic enrollment with auto escalation, he said, if the safe-harbor nonelective allows for the discretionary ACP safe harbor match and it is alongside 3% safe harbor match, the safe harbor notice is still required because of that match. However, if it’s a QACA nonelective and it has the discretionary ACP safe harbor match, no safe harbor notice is required. And, he suggested, look at the plan document language—it may have been written into the document that the requirements of the Internal Revenue Code will be followed for the cap in auto escalation. In that case, it won’t be necessary to amend the plan to increase the escalation cap to 15%. 

Safe Harbor Timing

But the “real meat” concerning design, he said, concerns timing of a safe harbor. Before SECURE, he noted, the safe harbor was pre-emptive; participants needed to be notified beforehand. After SECURE’s enactment, however, it is possible to have a mid-year or even retroactive safe harbor non-elective. 

With the change to a mid-year or retroactive safe harbor, said McKinney, there are questions to ask:

• Is the plan top heavy?
• Are there non-key employee highly compensated employees?
• Is the plan projected to fail the ADP test? Is it already failing it? 

He added that it is possible to add a 3% safe harbor mid-year, up to 30 days before the plan year end. Also, a 4% safe harbor can be added later–after 30 days before the end of the plan year and up to the deadline for corrective distributions from failed ADP test (the end of plan year following).

Adopting New Safe Harbor Plans 

Adopting a new safe harbor plan “is a hot topic right now,” said McKinney. “Remember, safe harbor plans are deferral plans,” he said, cautioning that “in order to start up a deferral plan, you need to give people a reasonable amount of time to defer.” McKinney said that the first pay date in October satisfies that requirement. Further, he said, if a safe harbor is to be added, that should be done by Dec. 1, regardless of whether it is a non-elective or a match. 

Weighing Options

McKinney also observed that there are choices related to safe harbor plans to be made: for instance, weighing monetary cost against the cost of time spent. “Some of you may be thinking, I could run a calculation of a qualified non elective contribution (QNEC) or a qualified matching contribution (QMAC) to pass testing, and it might cost less than a 3% nonelective contribution,” said McKinney. There is that possibility, he said; for instance, he observed, QNECs can be funded from forfeitures. “It’s a viable option,” he said, for passing testing. 

Still, McKinney said, “There may some of you thinking ‘it might cost less, but there are things that the QNECs and QMECs don’t necessarily solve that the safe harbor does and it may not be just about dollars and cents.’” He continued, “Keep in mind that it doesn’t really save you any time” to resort to a QNEC or a QMAC—especially if a plan is failing testing. In such a circumstance, he said, “this may be the last thing you want to do. If you know that you can calculate 3% based on the terms of the plan, that’s a time saver.” He added that it’s also “about your time, and the time you’re explaining things to the plan sponsor.”  

Available on Demand

The ASPPA Webcast, “Practical Implications for Post-SECURE Safe Harbor Plan Designs” is available on demand through Aug. 11, 2022. For more information, click here.