SECURE Act: Rules Relating to Election of Safe Harbor 401(k) Status (Section 103)

The Setting Every Community Up for Retirement Act of 2019 (SECURE Act) contains a provision that gives employers more flexibility surrounding the election of safe-harbor status.

Under prior law, a 401(k) plan sponsor electing safe harbor status was required to send out a notice to all participants before the beginning of the plan year in which the election would be effective. The SECURE Act eliminates this notice requirement for non-elective safe harbor plans – that is, plans that provide safe harbor contributions in the form of a profit-sharing contribution rather than a matching contribution. The safe harbor notice requirement still applies to plans using the matching contribution safe harbor.

The SECURE Act also allows plan sponsors to make a retroactive election to add non-elective safe harbor provisions after a plan year has started. Effective for plan years beginning after December 31, 2019, an election to provide a traditional 3% non-elective safe harbor contribution must be made no later than 30 days before the end of the plan year to which the election will apply. Further, if the amount of the contribution is at least 4% of compensation, the safe harbor election may be made as late as the end of the next following plan year.

These changes add some much-needed flexibility to 401(k) plan administration, as they eliminate the need for plan sponsors to make decisions about safe harbor status before knowing whether the safe harbor election will even be necessary. For plan years beginning after December 31, 2019, employers will have the option of waiting to see whether the plan satisfies ADP nondiscrimination testing before deciding to make a non-elective safe harbor contribution. If, near the end of the plan year, the plan is anticipated to fail ADP testing based on current contribution levels, employers will now have four choices: (1) distribute excess deferrals to highly compensated employees as necessary to pass the ADP test, as under prior law; (2) make a qualified non-elective contribution to the non-highly compensated employees; (3) make a safe harbor contribution of 3% of compensation and elect safe harbor status no later than 30 days before the end of the plan year; or (4) wait until after the plan year has ended, then elect to make a safe harbor contribution of 4% of compensation or more.

Interested in learning more about the SECURE Act? Download the SECURE Act eBook from the Schneider Downs Retirement Solutions team for a full overview of provisions and highlights at www.schneiderdowns.com/secure-act-ebook.