Since the inception of the safe harbor 401(k) plans in 1999, safe harbor 401(k) plans have evolved into one of the most popular 401(k) plan designs. The obvious advantage of the safe harbor 401(k) plan is the ability to avoid the ADP and ACP tests. An employer also may design the plan in such a way to avoid the top heavy requirements. However, the advantage of the safe harbor 401(k) plan is not limited to the relief from the administrative burdens of the ADP, ACP and top heavy requirements. By adding ACP safe harbor matching contribution formulas (“stacking") or adding integrated or cross-tested profit sharing formulas, the practitioner can leverage the plan to the advantage of the highly compensated employees (HCEs). The following FAQs address several of the questions practitioners frequently encounter in designing safe harbor 401(k) plans.

May an employer add matching contribution formulas in addition to the ADP safe harbor matching contribution formula (or, the 3% safe harbor nonelective contribution)? If so, may the additional matching contribution formulas qualify under the ACP safe harbor?

Yes. The employer may add matching contribution formulas in addition to the safe harbor contributions. If the additional matching contributions satisfy the requirements for the ACP safe harbor, the additional matching contributions are not subject to the ACP test (ACP safe harbor matching contributions).

May the plan impose vesting schedules on the ACP safe harbor matching contributions?

Yes. In fact, the employer may use the forfeitures derived from the ACP safe harbor contributions to reduce their costs. However, the plan cannot impose a vesting schedule on any contribution (nonelective or match) used to satisfy the ADP safe harbor requirements.

May the plan impose allocation conditions on the ACP safe harbor matching contributions?

No. If the plan wants the benefit of the ACP safe harbor, then no matching formula under the plan can be subject to allocation conditions.

Is there a limit on the number of matching contribution formulas an employer may include in a safe harbor 401(k) plan and continue to qualify under the ACP safe harbor requirements?

No. In fact, some practitioners utilize a plan design referred to as the “triple-stacked match" in which the plan includes an ADP safe harbor match, a discretionary match and a fixed match, all of which qualify under the ACP safe harbor requirements.

What is the advantage of adding ACP safe harbor matching contribution formulas?

Generally, the HCEs will obtain a larger share of the matching contributions because they earn more compensation and they defer more. Adding matching contribution formulas has the effect of further leveraging the matching contributions in favor of the HCEs.

What are some of the more popular safe harbor 401(k) plan design options an employer may use to reach the maximum 415 limit?

• Triple-stacked match (safe harbor match + fixed match + discretionary match [the fixed and discretionary match are ACP safe harbor matching formulas])
• Safe harbor match (or nonelective) combined with an integrated profit sharing formula
• Safe harbor nonelective combined with a cross-tested allocation formula
• Safe harbor (nonelective) cross-tested plan combined with a defined benefit (e.g., cash balance) plan (often referred to as the “DB/DC combo" plan")

Is there an advantage in including additional ACP safe harbor matching contributions rather than nonelective contributions (other than nonelective contributions used to satisfy the ADP safe harbor)?

The advantage of using ACP safe harbor matching contributions rather than extra nonelective contributions is that the plan can qualify for an exemption to the top heavy rules. As such, the plan can employ a “players only" design, limiting contributions to employees who defer.

In designing a safe harbor 401(k) with a cross-tested profit sharing allocation formula, should the employer use the safe harbor match or the safe harbor nonelective contribution to satisfy the ADP safe harbor requirements?

Generally, the employer should use the safe harbor nonelective contribution because that contribution may be used to satisfy the minimum gateway requirement and it may be used in rate group testing in the general nondiscrimination test. However, a plan may not use the matching contributions to satisfy the minimum gateway or in the rate group testing in the general nondiscrimination test.

May a plan use split eligibility (e.g., immediate eligibility for deferrals and one year of service and the attainment of age 21) for a safe harbor 401(k) plan?

Yes. The plan would use the “otherwise excludible employee" rule to divide the plan into two plans for testing (one plan would be for the employees who could satisfy a one year of service and age 21 eligibility condition [upper group] and the other plan would be for those employees who could not [lower group]). The upper group plan would be a safe harbor plan and the lower group plan would be subject to ADP testing (fortunately, the lower group plan is like to be made up of only nonhighly compensated employees [NHCEs]). However, doing this prohibits a plan from using the safe harbor top-heavy exemption.

In what circumstances would an employer select a safe harbor 401(k) plan design over a cross-tested plan design?

The cross-tested plan design is age sensitive. Therefore, if a substantial number of the NHCEs were older than the HCEs, the cross-tested plan design would not favor the HCEs. If the employer wanted to create disparity in favor of the HCEs, one of the safe harbor 401(k) plan designs could provide more favorable economics. Additionally, the safe harbor designs can allow great flexibility in contributions between owners.

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