---
title: Safe Harbor 401(k) Q+A
description: "Is it possible to reduce or suspend safe harbor contributions mid-year?

Yes. Employers can reduce or suspend either safe harbor match or nonelective contributions (as applicable) mid-year when all of the following conditions are met:"
---

[Employer & Plan Sponsor Blog | World Investment Advisors ](https://worldadvisors.com/blog/employer)

# [Safe Harbor 401(k) Q+A](https://worldadvisors.com/blog/employer/safe-harbor-401k-qa)

 Written by [Pensionmark Financial Group](https://worldadvisors.com/blog/employer/author/pensionmark-financial-group) | March 25, 2020

****

**Is it possible to reduce or suspend safe harbor contributions mid-year?**

Yes. Employers can reduce or suspend either safe harbor match or nonelective contributions (as applicable) mid-year when all of the following conditions are met:

- Either of the following conditions apply: 
    - The employer is operating at an economic loss.
    - The safe harbor notice provided before the start of the plan year includes a statement that the employer may reduce or suspend contributions mid-year.
- A supplemental notice is distributed to eligible employees at least 30 days before the effective date of the reduction or suspension.
- Eligible employees have a reasonable opportunity to change their deferral election before the reduction or suspension occurs.
- The 401(k) plan is ADP/ACP tested for the full plan year in which the reduction or suspension occurs using the current year testing method.

**Can a safe harbor 401(k) plan be amended mid-year?**

It depends. Employers can [amend a safe harbor 401(k) plan mid-year](https://www.irs.gov/retirement-plans/mid-year-changes-to-safe-harbor-401k-plans-and-notices) when all of the following conditions are met:

- If the amendment will affect the content of the safe harbor notice provided before the start of the plan year, the employer must: 
    - Distribute a new notice to eligible employees 30-90 days before the effective date of the amendment.
    - Give eligible employees a reasonable opportunity to change their deferral election before the amendment’s effective date. A 30-day election period is deemed reasonable.
- The amendment cannot be a prohibited mid-year change listed in [Notice 2016-16](https://www.irs.gov/pub/irs-drop/n-16-16.pdf).

**What are the employer contribution requirements for a safe harbor 401(k) plan?**

Safe harbor 401(k) plans require an employer to make either an eligible matching or nonelective contribution to participants.

- **Safe harbor **[**matching contribution**](https://www.employeefiduciary.com/blog/401k-matching-contributions#:~:text=Employer%20matching%20contributions%20are%20only,%2Dtax%20or%20Roth\)%20themselves.&text=A%20match%20formula%20can%20also,%25%20\(4%25%20total\).)** –** Employers have two options: 
    - **Basic match -** 100% match on the first 3% of deferred compensation plus a 50% match on deferrals between 3% and 5% (4% total).
    - **Enhanced match –** Must be at least as generous as the basic match at each tier of the match formula. A common formula is a 100% match on the first 4% of deferred compensation.
- **Safe harbor nonelective contribution –** 3% (or more) of compensation, regardless of employee deferrals.

[Highly-Compensated Employees (HCEs)](http://www.investopedia.com/terms/h/highly-compensated-employee.asp) can be excluded from these contributions. They must be 100% immediately vested.

**What’s a Qualified Automatic Contribution Arrangement (QACA)?**

A [QACA](https://www.employeefiduciary.com/blog/traditional-safe-harbor-401k-plan-vs.-qaca-how-to-choose) is a type of safe harbor 401(k) plan that includes an [automatic enrollment](https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-automatic-enrollment) feature. QACAs must meet the following requirements:

- The employer must make one of the following contributions to plan participants: 
    - **QACA match –** 100% match on the first 1% of compensation deferred and a 50% match on deferrals between 1% and 6% (3.5% total). A more generous match formula is also allowed.
    - **QACA nonelective –** 3% (or more) of compensation, regardless of employee deferrals.
- QACA contributions can be subject to a vesting schedule - up to a 2-year cliff.
- The default deferral rate of the automatic enrollment feature is subject to the following limits: 
    - **Minimum -** 3% for the first year of plan participation, increased by 1% annually until 6% is reached.
    - **Maximum -** 10% for the first year of plan participation. For subsequent years, the SECURE Act raised the cap to 15%.
- A [Qualified Default Investment Alternative (QDIA)](https://www.dol.gov/sites/dolgov/files/EBSA/about-ebsa/our-activities/resource-center/fact-sheets/final-rule-qdia-in-participant-directed-account-plans.pdf) must be used to invest participants that fail to make affirmative investment election themselves.

**Are profit-sharing contributions made to a safe harbor 401(k) plan subject to testing?**

Yes. Regardless of a 401(k) plan’s safe harbor status, a [profit-sharing contribution](https://www.employeefiduciary.com/blog/employer-profitsharing-contributions-401k-retirement-plan) must satisfy the 401(a)(4) nondiscrimination test. While a pro-rata or permitted disparity formula will generally pass this test automatically, a [“new comparability”](http://www.plansponsor.com/MagazineArticle.aspx?id=6442460520) formula must pass the 401(a)(4) “general test.”

**Can an additional discretionary match also exempt from the ACP test?**

It depends. If an employer wants to make a discretionary match in addition to safe harbor contributions, it must meet two conditions to be exempt from the ACP test:

- The match formula cannot be based on more than 6% of deferred compensation.
- The match cannot exceed 4% of deferred compensation in total.

For example, a discretionary 50% match on the first 6% of deferred compensation (3% total) would be exempt from the ACP test, while 25% match on the first 10% of deferred compensation (2.5% total) would not.

A discretionary match can be subject to a vesting schedule – up to a 3-year cliff or 6-year graded schedule.

**Is a safe harbor 401(k) plan always exempt from top-heavy testing?**

No. A safe harbor 401(k) plan would be subject to top-heavy testing for plan years in which one or more of the following events occur:

- Safe harbor contributions are subject to longer [eligibility requirements](https://www.employeefiduciary.com/blog/401k-eligibility-when-to-let-employees-join-your-401k-plan#:~:text=401k%20eligibility%20basics&text=The%20maximum%20age%20and%20service,and%202%20years%20of%20service) than employee deferrals.
- A profit-sharing contribution (including forfeiture reallocations) is made by the employer.
- A match that’s not exempt from the ACP test is made by the employer.
- [Voluntary (non-Roth) after-tax contributions](https://blog.employeefiduciary.com/blog/whats-old-is-new-again-mega-back-door-roth-ira-contributions-spark-new-interest-in-old-school-after-tax-contributions) are made by participants.

However, all employer contributions made during the plan year will count towards satisfying the 3% top-heavy minimum contribution (if applicable).

**What are the participant disclosure requirements for a safe harbor 401(k) plan?**

For plan years beginning after December 31, 2019, only match-based safe harbor 401(k) plans are subject to a participant disclosure requirement (the SECURE Act made nonelective-based safe harbor plans exempt).

If applicable, a [safe harbor notice](https://www.irs.gov/retirement-plans/fixing-common-plan-mistakes-failure-to-provide-a-safe-harbor-401k-plan-notice) must be distributed to plan participants within a reasonable period before the start of each plan year. In general, “reasonable” means:

- 30-90 days before the start of each plan year.
- For new participants, generally no earlier than 90 days before their plan entry date and no later than that date.

**What’s the deadline for establishing a new safe harbor 401(k) plan?**

In general, the first year of a new safe harbor 401(k) plan must be at least 3 months long – to give all plan participants the opportunity to make wage deferrals. That means the deadline for establishing a new calendar-based plan is October 1.

**What’s the deadline for amending a traditional 401(k) into a safe harbor plan?**

A formal plan amendment is necessary to convert a traditional 401(k) into a safe harbor plan. The deadline for executing this amendment will depend upon the type of safe harbor contribution to be made.

- **Safe harbor match –** amendment deadline is the last day of year preceding the plan year in which the plan will be safe harbor. 
    - However, the safe harbor notice must be distributed sooner - 30-90 days before the start of the plan year.
- **Safe harbor nonelective –** The SECURE Act made this amendment deadline much more flexible. It’s based on the nonelective contribution formula: 
    - *Less than 4%* - up to 30 days before the close of the plan year in which the plan will be safe harbor.
    - *4%* or greater - The last day of the plan year following the plan year in which the plan will be safe harbor (i.e., the deadline for distributing ADP/ACP corrective refunds).

**What tax credits apply to a safe harbor 401(k) plan?**

Small businesses (up to 100 employees) can earn a [tax credit](https://www.irs.gov/retirement-plans/retirement-plans-startup-costs-tax-credit) to cover 50% of the ordinary and necessary costs of starting a new retirement plan – including a safe harbor 401(k) plan. The SECURE Act increased its annual cap from $500 to the greater of:

- $500 or
- the lesser of 
    - $250 multiplied by the number of non-highly compensated employees eligible for plan participation or
    - $5,000.

This tax credit is available for up to three years.

Small businesses can earn an additional $500 tax credit by adding an automatic enrollment feature to either a new or existing 401(k) plan. The credit is available for each of the first three years the feature is effective.

 

*Pensionmark Financial Group does not provide tax or legal advice.  Please consult with a tax professional prior to deciding on any distribution option.*

[View full post](https://worldadvisors.com/blog/employer/safe-harbor-401k-qa)

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