The Pension Protection Act of 2006 created a new safe harbor plan under Section 401(k) called a “qualified automatic contribution arrangement,” available for plan years beginning after 2007.¹

Plans that provide for automatic enrollment and meet certain other requirements for the safe harbor will satisfy the ADP/ACP requirements (Q 3753, Q 3802) and be excluded from the top heavy requirements (Q 3916 to Q 3922). For this treatment to apply, a plan must satisfy an automatic deferral requirement, an employer contribution requirement, and a notice requirement.²

The automatic deferral requirement states that each employee eligible to participate in the plan must be treated as having elected to have the employer make elective contributions equal to a “qualified percentage.” The threshold amount of the automatic deferral percentage may not be less than 3 percent for the first year the employee’s deemed election applies. Employees may affirmatively elect out of the plan or elect a different deferral percentage. In the second year, this default percentage must increase to 4 percent, then 5 percent in the third year, and 6 percent in the fourth year and thereafter.³ A plan may provide for a higher percentage so long as it is applied uniformly, although the percentage may not exceed 15 percent. The SECURE Act increased the default percentage from 10 percent to 15 percent for tax years beginning after 2019 for any year after the first plan year when the employee’s compensation is automatically deferred into the plan.⁴ The contributions generally must continue until the last day of the plan year that begins after the date on which the first elective contribution under the automatic deferral requirement is made with respect to the employee.⁵

An employer also must provide either a matching or a nonselective contribution. The match amount must be 100 percent of the first 1 percent of compensation deferred, plus 50 percent of the amount of elective contributions over 1 percent but not exceeding 6 percent of compensation deferred. If an employer provides a nonselective contribution, it must be an amount equal to 3 percent of compensation for each employee eligible to participate in the arrangement.⁶ The plan may impose a two year vesting requirement with respect to employer contributions, but employees then must be 100 percent vested after two years.⁷

The written notice requirement is met if within a reasonable period before each plan year, each employee who is eligible to participate in the plan receives a written notice of his or her rights and obligations under the plan. The notice must be sufficiently accurate and comprehensive to apprise the employee of those rights and obligations, and it must be written in a manner that is calculated to be understood by the average employee to whom the plan applies. The notice must explain the employee’s right to elect not to have elective contributions made under the plan, or to have contributions made at a different percentage. If the plan allows the employee to choose from among two or more investment options, the notice must inform the employee how the account will be invested in the absence of any investment election. The employee also must have a reasonable period of time after receipt of the notice and before the first elective contribution to make one of the foregoing elections.⁸

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Planning Point: Further, under the SECURE Act, the notice requirements for safe harbor nonelective contributions of at least 3 percent of employer compensation has been eliminated (notice requirements for plans that provide only for an employer match remain in place).

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Relief Provisions

Effective August 17, 2006, ERISA preempts any state laws that would “directly or indirectly prohibit or restrict the inclusion in any plan of an automatic contribution arrangement.”⁹ This provision is designed to resolve the problem of state laws that treat automatic withholding by a 401(k) arrangement as a prohibited garnishment of wages. The DOL is authorized to issue regulations establishing minimum standards that an arrangement would have to satisfy to qualify for the application of this provision.¹⁰

For plan years beginning after 2007, relief from the 401(k) distribution restrictions (Q 3797) and the 10 percent penalty (Q 3969) is available during the first 90 days following the start of automatic deferrals, in the event that contributions are withheld erroneously. This relief applies not only to automatic enrollment safe harbor plans, but to other automatic enrollment plans that meet the definition of an “eligible automatic contribution arrangement.”¹¹

An eligible automatic contribution arrangement is a plan:

(1)    Under which a participant may elect to have the employer make payment as contributions under the plan on behalf of the participant, or to the participant directly in cash;

(2)    under which the participant is treated as having elected to have the employer make such contributions in an amount equal to a uniform percentage of compensation provided under the plan until the participant specifically elects not to have such contributions made or elects a different percentage;

(3)    under which, in the absence of an investment election by the participant, the contributions are invested under the provisions of new ERISA Section 404(c)(5), in accordance with regulations described in Q 3772; and

(4)    that meets certain notice requirements.¹²

The timing and content of the notice requirement is virtually identical to that of the automatic enrollment safe harbor, set forth above.¹³

Refunds of excess contributions and excess aggregate contributions (Q 3808) from eligible automatic contribution arrangements will be subject to an extended time deadline. Instead of 2½ months, the plans will have six months to make refunds of such distributions.¹⁴

For plan years beginning after 2006, participants in individual account plans that meet specific notice requirements will be deemed to have exercised control over the assets in their accounts with respect to the amount of contributions and earnings that, in the absence of an investment election by the participants, are invested by the plan in accordance with regulations.¹ Final regulations offer fiduciaries relief from liability for losses resulting from automatically investing participant accounts in a qualified default investment alternative (QDIA). In addition, the fiduciary would not be liable for the decisions made by the entity managing the QDIA. Fiduciaries, however, remain liable for prudently selecting and monitoring any QDIA under the plan.²

For the regulatory relief to apply:

(1)    the assets must be invested in a QDIA, as defined below;

(2)    the participant or beneficiary on whose behalf the account is maintained must have had the opportunity to direct the investment of the assets in his or her account but did not do so;

(3)    the participant or beneficiary must be provided with a notice meeting requirements set forth in regulations, a summary plan description, and a summary of material modification at least 30 days before the first investment and at least 30 days before each plan year begins;

(4)    any material relating to the investment, such as account statements, prospectuses, and proxy voting material must be provided to the participant or beneficiary;

(5)    the participant or beneficiary must be permitted to make transfers to other investment alternatives at least once in any three month period without financial penalty; and

(6)    the plan must offer a “broad range of investment alternatives,” as defined in DOL Regulation Section 2550.404c-1(b)(3).³

The notice required for a QDIA must:

(1)    describe the circumstances under which assets in the individual account of an individual or beneficiary may be invested on behalf of a participant or beneficiary in a QDIA;

(2)    explain the right of participants and beneficiaries to direct the investment of assets in their individual accounts;

(3)    describe the QDIA, including its investment objectives, risk and return characteristics (if applicable), and fees and expenses;

(4)    describe the right of the participants and beneficiaries on whose behalf assets are invested in a QDIA to direct the investment of those assets to any other investment alternative under the plan, without financial penalty, and

(5)    explain where the participants and beneficiaries can obtain investment information concerning the other investment alternatives available under the plan.⁴

A qualified default investment alternative means an investment alternative that meets five requirements:

(1)    it does not hold or permit the acquisition of employer securities except as provided below;

(2)    it does not impose financial penalties or otherwise restrict the ability of the participant or beneficiary to make transfers from the default investment to another plan investment;

(3)    it is managed by an investment manager, a registered investment company, or a plan sponsor that is a named fiduciary;

(4)    it is diversified, to minimize the risk of large losses; and

(5)    it constitutes one of three investment products (for example, a life cycle fund, a balanced fund, and a managed account) described in the regulations, each of which offers long-term appreciation and capital preservation through a mix of equity and fixed income exposures.⁵

Final regulations permit the use of capital preservation funds (money market or stable value funds) only for a limited duration of not more than 120 days after a participant’s initial elective deferral. After 120 days, funds must be redirected to one of the three regular qualified default investment alternatives.⁶

The regulations set forth two exceptions for the holding of employer securities:

(1)    The first is for the acquisition of employer securities held or acquired by a registered investment company (or similar pooled investment vehicle that is subject to state or federal examination) with respect to which such investments are in accordance with the stated investment objectives of the investment vehicle and are independent of the plan sponsor or its affiliate.⁷ In the preamble to the proposed regulations, the DOL explained that this exception should accommodate large publicly traded employers whose default investment alternatives may include pooled investment vehicles that invest in such companies.⁸

(2)       A second exception is provided with respect to accounts managed by an investment management service for employer securities acquired as a matching contribution from the employer/plan sponsor or for employer securities acquired prior to management by the investment management service.⁹

Editor’s Note: Prior to the SECURE Act 2.0, business owners could not change from a SIMPLE IRA to a safe harbor 401(k) before the end of the year.  By November 2, the employer was required to provide notice of the switch to employees.  The formal termination date was always December 31, and the 401(k) start date was January 1.  SECURE 2.0 relaxed the rules so that employers can terminate a SIMPLE IRA mid-year and replace it with a safe harbor 401(k).  Pursuant to IRS guidance, the employer must take formal written action and specify the termination date.  Employees must be given a 30-day notice before the termination date.  The notice must tell them that no salary reductions to the SIMPLE IRA will be made based on compensation paid after the termination date.  The employer must make matching contributions attributable to employee compensation earned through the termination date.  During the year of transition, the total amount contributed as salary reduction contributions under the terminated SIMPLE IRA plan and as elective contributions under the safe harbor section 401(k) plan cannot exceed the weighted average of the salary reduction contribution and elective contribution limits for each of those plans (based on how many of the 365 days in the transition year each plan was in effect).

The IRC requires that deferrals, matching, and after-tax employee contributions to 401(k) or 401(m) plans satisfy certain nondiscrimination tests. A plan that is designed to meet certain safe harbors is deemed to have met those testing requirements. These tests are referred to as the ADP test for salary deferrals and the ACP test for employee after-tax and matching employer contributions. The requirements for meeting the safe harbors of 401(k) and 401(m) plans include specific plan provisions that generally require a fully vested employer contribution, one or more advance notice requirements (but see the Editor’s Note below), and certain restrictions on the level of discretionary matching contributions.

A plan may be designed to satisfy safe harbors for deferrals but not for the matching employer contribution.

The safe harbor plan requirements prohibit placing restrictions on a participant’s right to receive the match or 3 percent of pay employer contribution. Thus, the contribution must be given to employees who terminate employment in the plan year (Q 3802, Q 3804). The safe harbor does not eliminate the requirement of ACP testing for employee after-tax contributions.¹ In addition, 401(k) plans that meet the safe harbor of 401(k) and 401(m) generally are exempt from the top-heavy requirements (Q 3916 to Q 3922), except as explained below.²

Regulations permit the required safe harbor contributions to be made to the 401(k) plan or other defined contribution plans of the employer.³ Except for the provisions described below, a safe harbor plan generally is subject to the same qualification requirements of IRC Section 401(a) as a traditional 401(k) plan.

The fact that a plan is a safe harbor 401(k) does not prevent certain lower income taxpayers from being eligible to claim the saver’s credit for elective deferrals (Q 3648).

The dollar limit on elective deferrals to a safe harbor plan is the same as for a traditional 401(k) plan (Q 3760).

A safe harbor plan generally may also permit catch-up contributions by participants who are at least age 50 by the end of the plan year.⁴ The limit on catch-up contributions (Q 3761) to safe harbor plans is calculated in the same manner as if made to a nonsafe harbor 401(k) plan.⁵ The dollar limit for salary deferrals is $23,000 in 2024 ($22,500 in 2023, $20,500 in 2022, $19,500 in 2020-2021, $19,000 in 2019) and the catch-up contribution limit is  $7,500 for 2023-2024 ($6,500 for 2020-2022).⁶

Safe harbor 401(k) and 401(m) plans generally are exempt from the top-heavy requirements; where additional employer contributions are made (e.g., profit sharing), that exemption is lost.⁷

Editor’s Note: Under the SECURE Act, beginning in tax years after December 31, 2019, a plan sponsor may switch an existing 401(k) plan to a safe harbor 401(k) with nonelective contributions at any time prior to 30 days before the close of a plan year. An amendment to do this can even be made later than this deadline if it provides (i) a nonelective contribution of at least 4 percent of compensation (versus 3 percent) for all eligible employees for the plan year; and (ii) the plan is amended no later than the last day for distributing plan excess contributions for the plan year, which is the close of the following plan year.

The SECURE Act also eliminates the safe harbor notice requirement for nonelective contributions. However, it retains the requirement to allow employees to make or change a deferral election at least once per year.⁸ In addition, there is a new tax credit for certain small employers that include an automatic enrollment feature (a QACA) in their plan, whether new or existing.⁹ See Q 3776.

Editor’s Note: Under the law prior to January 1, 2020, a safe harbor 401(k) plan was required to provide an annual participant notice prior to each plan year alerting participants to their plan rights and obligations. This notice was required whether the employer safe harbor contribution was provided by a non-elective (i.e., profit-sharing) or matching employer contribution. Under the SECURE Act for plan years beginning after December 31, 2019, the annual safe harbor notice has been eliminated for 401(k) plans that are based upon nonelective employer contributions. See Q 3776.

The notice requirement remains for plans based upon employer matching contributions. In addition, under the SECURE Act, a nonelective contribution 401(k) plan can be adopted on any date prior to 30 days before the end of the plan year still using the 3 percent of compensation nonelective contribution. However, if the noncontribution plan is adopted within the last 30 days of a plan year, the required nonelective contribution rises to 4 percent of compensation. Regardless, the ability to adopt a nonelective plan midyear is not available if the plan was a matching contribution safe harbor 401(k) plan at any time during a year.¹

Every year, an employer must provide certain written notices to each employee eligible to participate in a plan. This notice must be provided prior to the start of the plan year. The written notice must include a statement as to which type of safe harbor contribution will be made to the plan (i.e., the safe harbor match or safe harbor nonelective contribution). The statement must explain:

(1)    how the contribution is calculated and whether any conditions exist to be eligible to use it, including a description of the levels of safe harbor matching contributions;

(2)    whether any other contributions may be made under the plan or to another plan on account of elective contributions or after-tax employee contributions made to the plan;

(3)    the plan to which safe harbor contributions will be made if it is different from the plan containing the cash or deferred arrangement;

(4)    the type and amount of compensation that may be deferred under the plan;

(5)    how to make cash or deferred elections, including any administrative requirements that apply to such elections;

(6)    the periods available under the plan for making cash or deferred elections;

(7)    withdrawal and vesting provisions applicable to contributions under the plan; and

(8)    information that makes it easy to obtain additional information about the plan, including an additional copy of the summary plan description and telephone numbers, addresses, and, if applicable, electronic addresses, of individuals or offices from whom employees can obtain such plan information.²

A plan that fails to meet any of these requirements will fail to be a safe harbor plan and will require the ADP and/or ACP testing of the plan year.

The timing requirement for the notice requirement is satisfied if the notice is provided within a reasonable period before the beginning of the plan year. This requirement is deemed met if the notice is provided to each eligible employee at least 30 days, and not more than 90 days, prior to the end of the plan year (i.e., by December 1 for a calendar year).³ Further, under the SECURE Act, the notice requirements for safe harbor nonelective contributions of at least 3 percent of employer compensation has been eliminated (notice requirements for plans that provide only for an employer match remain in place).

Plan sponsors are permitted to amend their 401(k) plan documents to provide for safe harbor nonelective contributions (1) no later than 30 days prior to the end of the plan year or (2) if the employer contribution is at least 4 percent of employee compensation, after 30 days prior to the end of the plan year and before the last day for distributing excess contributions to the plan (usually, by the end of the next plan year).⁴

Notice 2020-86 provides information on how safe harbor retirement plans should implement the new SECURE Act rules. The SECURE Act increased the 10 percent cap for automatic enrollment safe harbor plans to 15 percent. The law also eliminated certain safe harbor notice requirements if the plan provides for safe harbor nonelective contributions. Under the guidance, plans are not required to increase the maximum qualified percentage of compensation, as long as the percentage is applied uniformly and does not exceed 15 percent (or 10 percent initially). Plans that incorporate the 15 percent limit by reference, yet continue to apply the 10 percent maximum, will fail to operate in accordance with their terms unless the plan is amended.

Further, the guidance confirms that the notice rules are only eliminated for certain plans. For example, if the plan is a traditional safe harbor 401(k) that satisfies the safe harbor nonelective contribution requirements, but also provides non-safe harbor matching contributions and is not required to satisfy the ACP test, the notice requirements continue in place.

Contingent Notice

There is one type of 401(k) safe harbor plan that requires a contingent notice. This plan design allows the employer to wait until 30 days before the close of the plan year to decide if the plan will be a safe harbor plan by making the fully-vested 3 percent of compensation, nonelective safe harbor. This type of plan must provide a contingent notice before the start of the plan year and a second notice when the employer decides to make the safe harbor contribution. The contingent notice must set forth the same information as above, and also state that the plan may be amended during the plan year to include the 3 percent safe harbor contribution. If the employer elects to make the contribution, the plan must be amended to reflect the contribution. Both the amendment and the follow-up notice are required to be provided to each eligible employee at least 30 days prior to the end of the plan year (i.e., by December 1 for a calendar year plan).⁵

Much of the information in the summary plan description can be cross referenced rather than set forth again in the notice.⁶ In either case, the notice must be sufficiently accurate and comprehensive to inform the employee of his or her rights and obligations and must be written in a manner calculated to be understood by the average employee eligible to participate.⁷

Editor’s Note: The SECURE Act, enacted December 20, 2019, has eliminated the annual safe harbor notice to participants of their rights and obligations for 401(k) safe harbor plans in the case of nonelective safe harbor plans. In addition, the SECURE Act also allows a nonelective plan to be adopted any time before the 30th day prior to the close of the end of the plan year, and even after until as late as the end of the following plan year; provided, the sponsor makes a 4 percent of compensation rather than the usual 3 percent nonelective contribution, and the plan was not a matching safe harbor 401(k) at any time during the year. These new rules apply for plan years after December 31, 2019.¹

The safe harbor matching contribution requirement is met if a matching contribution is made to each nonhighly compensated employee in one of two ways: the basic match or the enhanced match. Both become an obligation of the employer for the plan year (with certain exceptions).

The basic match is an employer contribution equal to 100 percent of the salary deferrals to the extent they do not exceed 3 percent of compensation, plus a match equal to 50 percent of the salary deferrals that exceed 3 percent but do not exceed 5 percent of the compensation.²

The enhanced match is a matching contribution under a formula that provides matching contributions that are at least the total matching contributions made under the basic match, regardless of the employee’s rate of elective contributions.³

The safe harbor match must be fully vested at all times. Matching of catch-up contributions is not required; if done, they must be provided for all participants.⁴

In no event may the rate of matching contributions for a highly compensated employee exceed that for a nonhighly compensated employee.⁵ The IRC allows some variation on the basic formula described above, but the end result essentially must be the same as under these percentages and the rate of the match cannot go up with the rate of contributions.⁶

Matching contributions may be offered on both elective deferrals and employee after-tax contributions, provided that the match on elective deferrals is not affected by the amount of employee contributions, or matching contributions are made with respect to the sum of an employee’s elective deferrals and employee contributions under the same terms as they are made with respect to elective deferrals.⁷

The IRS has stated that matching contributions may be made on the basis of compensation paid for a payroll period, a month, a quarter, or at year-end.⁸ The selection of a pay period basis means that if the employee contributes more than is necessary to receive a match for the pay period, there is no requirement to increase the match in other periods when the employee defers less than enough to receive the maximum match. Under prior law, if an employee has restrictions placed on other deferrals (for example, takes an in-service hardship distribution), the plan could impose a six month suspension on participation to the same extent as required by a traditional 401(k) plan (Q 3795).⁹ Note, however, that the six month suspension requirement was eliminated under the Bipartisan Budget Act of 2018 (BBA 2018) for tax years beginning after 2018.¹⁰ While some changes made by the BBA 2018 are optional, this change was mandatory for plans.

A plan that satisfies the ADP test through safe harbor matching contributions automatically will satisfy the ACP test for certain discretionary contributions and the safe harbor match. The discretionary match cannot exceed 40 percent of compensation and cannot be based on deferrals exceeding 6 percent of compensation (Q 3799).

Likewise, a plan that satisfies the ADP test through the nonelective contribution safe harbor under Treasury Regulation Section 1.401(k)-3(b) automatically will satisfy the corresponding ACP test safe harbor as long as the same restrictions on matching contributions exist.¹¹ If the plan provides for additional matching contributions, then the ACP must be prepared.¹²

Nonelective Safe Harbor

The nonelective safe harbor contribution requirement is met if an employer contribution is made on behalf of all eligible nonhighly compensated employees in an amount equal to at least 3 percent of the employee’s compensation (however, see Editor’s Note above).¹³ This contribution is made to the accounts of all participants who are eligible, not just those making salary deferrals.

The nonelective contributions must be fully vested and subject to the withdrawal restrictions on IRC Section 401(k) plans (Q 3794).¹⁴

One important advantage of the 3 percent safe harbor contribution is that it may be used to satisfy the nondiscrimination requirements of IRC Section 401(c)(4). It is not subject to the limitations that apply to QNECs for use in such testing (Q 3797). Contributions used to satisfy the 3 percent safe harbor contribution may not be taken into account in determining whether a plan satisfies the permitted disparity rules (i.e., Social Security integration) (Q 3860).¹⁵

Discretionary Match to Safe Harbor Plan

Safe harbor plans retain their ability to satisfy the ACP test for discretionary matching contributions if the contributions are limited in amount. Those limits require that discretionary matching contributions may be made where: (1) based on salary deferrals that are not in excess of 6 percent of the employee’s compensation and limited to no more than 4 percent of the participant’s compensation, (2) the rate of the employer’s matching contribution does not increase with the rate of the employee’s elective deferral or contribution, and (3) the matching contribution with respect to any highly compensated employee at any rate of employee contribution or rate of elective deferral is not greater than that made with respect to a nonhighly compensated employee.¹⁶

If matching contributions are made in excess of this limitation, the ACP test will be required for the plan year.¹⁷

The IRS has issued final regulations that permit a safe harbor nonelective 401(k) plan to reduce or suspend safe harbor contributions mid-year if the plan contains a statement that such action is a possibility and the amendment does not become effective until 30 days after participants receive a supplemental notice of the mid-year amendment.¹

The IRS provided COVID-19 relief for safe harbor plan sponsors who acted by August 31, 2020. COVID-19 placed a strain on many business owners, making it difficult for some employers to keep up with mandatory employer matching contributions. Notice 2020-52 allowed plan amendments to reduce or suspend safe harbor contributions to non-highly compensated employees if they were made by August 31, 2020. The plan then became subject to nondiscrimination testing for the plan year.If the safe harbor contributions being suspended or reduced were nonelective employer contributions (as opposed to matching contributions), the 30-day requirement for supplemental notice was satisfied if the notice was provided by August 31, 2020 and the amendment was adopted no later than the effective date of the suspension or reduction. If matching contributions were reduced or suspended, there was no relief from the 30-day requirement (to give employees time to decide whether to change their own elective contributions).

The IRS also clarified that contributions for highly-compensated employees are not safe harbor contributions—so they can always be reduced or suspended.²

In Notice 2016-16³, the IRS provided guidance on the safe harbor notice that must be provided to participants. The Notice also states that if it is not practicable for the revised safe harbor notice to be provided before the effective date of the change, the notice was considered to be timely if it was provided as soon as practicable, but not later than 30 days after the date the change was adopted. Notice 2016-16 also specified changes to safe harbor plans that cannot be made mid-year unless required by applicable law to be made mid-year, such as a change mandated by a law change or court decision.

Previously, an employer was only permitted to exit a safe harbor nonelective 401(k) plan if the employer was experiencing a substantial business hardship. Factors to be considered in making this determination included whether the employer was operating at an economic loss, general industry conditions and whether the employer would be able to continue the plan without eliminating the safe harbor contributions.

As a result of the new regulations, an employer is able to design its plan to provide the option of reducing or eliminating safe harbor nonelective contributions regardless of profitability. The regulations are retroactively effective and apply to plan years beginning after May 18, 2009.⁴

Finally, note that the annual participant notice requirements for nonelective contribution 401(k) safe harbor plans has been eliminated for plan years beginning after December 31, 2019 under the SECURE Act.⁵

SIMPLE 401(k) plans (Q 3778) provide a design-based alternative to the use of a safe harbor plan. Some of the differences between safe harbor plans and SIMPLE 401(k) plans are as follows:

(1)    Employees covered by a SIMPLE 401(k) plan may not be participants in any other plan offered by the employer, although employees participating in a safe harbor plan may be covered by more than one plan.

(2)    SIMPLE 401(k) plans are subject to the lower dollar limits on elective deferrals and catch-up contributions that apply to SIMPLE IRAs, rather than those applicable to traditional 401(k) plans.

(3)    Employers offering a SIMPLE 401(k) plan may not offer any contributions other than those provided under the SIMPLE 401(k) requirements, although employers maintaining a safe harbor plan may do so within the limitations described in Q 3775.

(4)    Safe harbor plans may be offered by any employer, although SIMPLE 401(k) plans are available only to employers with 100 or fewer employees earning $5,000 or more in the preceding year.

(5)    Contributions required under a safe harbor design may be made to a separate plan of the employer, although contributions required under a SIMPLE 401(k) design must be made to the SIMPLE 401(k) plan.

(6)    A SIMPLE 401(k) plan must provide the required notice to employees at least 60 days before the beginning of the plan year while safe harbor 401(k) plans must provide notice at least 30 days before the beginning of the plan year, except in the case of certain nonelective contribution safe harbor plans.¹

(7)    A SIMPLE 401(k) plan cannot be established by completing IRS Form 5304-SIMPLE or IRS Form 5305-SIMPLE. It requires a formal written plan document.

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Planning Point: A SIMPLE 401(k) must file a Form 5500 but SIMPLE IRAs do not. Anyone considering a SIMPLE 401(k) plan can accomplish the same funding in a SIMPLE IRA. Note that the penalties for failing to file a Form 5500 are steep and increase with every day the filing is late. Pre-SECURE Act, the IRS could assess a penalty of up to $25 per day with a cap of $15,000 per year. Effective for years beginning after December 31, 2019, the penalty has increased to $250 per day for late filers and up to $150,000 per plan year (note that the additional DOL penalty exceeds $2,000 per day with no annual cap).²

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Planning Point: The SECURE Act now allows employers to adopt retirement plans after the close of the employer’s tax year (by the due date, including extensions, for filing its tax return). The employer may elect to treat the plan as having been adopted as of the last day of the tax year (the new rule applies after December 31, 2019). If an employer adopts a plan prior to the tax filing deadline and treats the plan as having been adopted as of the last day of the employer’s 2020 tax year, the plan sponsor is not required to file Form 5500 for the plan year that begins during the employer’s 2020 tax year. The first Form 5500 required to be filed instead will be the 2021 Form 5500. The plan sponsor should check a box on the 2021 Form 5500 indicating that the employer elects to treat the plan as retroactively adopted as of the last day of the 2020 tax year.

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