My employer posted a notice that it has adopted a Safe Harbor 401(k) Plan. What is a Safe Harbor 401(k) Plan?

A Safe Harbor 401(k) Plan is a relatively new type of 401(k) Plan that automatically meets certain IRS non-discrimination requirements, unlike a traditional 401(k) plan, if the employer commits to making one of two types of employer contributions. The first is a 3% of pay non-elective (profit sharing) contribution required to be made on behalf of any participant who has met the eligibility requirements for salary deferral contributions, whether or not the participant actually participates in the salary deferral arrangement. The second type of contribution is an employer matching contribution whose formula, in the aggregate, may not be less than 100% on the first 3% of a participant’s pay deferred to the plan and 50% on the next 2% of a participant’s pay deferred to the plan. A participant must actually participate in the salary deferral arrangement to be eligible for the employer matching contribution.

The employer’s chosen Safe Harbor contribution must be 100% vested when made for each participant, but there are certain withdrawal restrictions that apply to these types of contributions resembling those that apply to salary deferral contributions. For example, a plan participant may not rollover these types of contributions if distributed from the plan on account of hardship (see the FAQ related to hardship withdrawals), as well as certain other restrictions.

With this type of 401(k) plan, a plan participant may defer salary to the plan in an amount not exceeding the lower of the following: the maximum salary deferral percent defined in the plan document and listed in the plan’s SPD; the annual IRS limit on salary deferral amounts ($10,500 for 2001); or the Internal Revenue Code Section 415 limit (the lesser of 25% of pay or $35,000 in 2001). For example, suppose the plan defines the maximum salary deferral percent to be 15% of pay while an eligible participant. Suppose further that your annual pay is $40,000 and you are eligible to participate in the plan for the entire plan year. Your salary deferral limit would be $6,000 for the year in question because 15% is the lower of the three limits cited above.

There are many other nuances associated with this type of plan, too numerous to mention here. Refer to the notice posted by your employer for further details or contact your plan’s Plan Administrator.