Common Mistake: Failure to Provide Safe Harbor Notice to Eligible Employees

A Safe Harbor 401(k) plan differs from a traditional 401(k) plan because it allows employers to avoid annual ADP (Actual Deferral Percentage) and ACP (Actual Contribution Percentage) nondiscrimination testing by making fully vested contributions to eligible employees. These contributions can either be:

• Non-elective contributions for all eligible employees, or
• Matching contributions for employees who make salary deferrals.

For more information about the minimum contribution requirements for Safe Harbor 401(k) plans, please refer to Ekon Explains: Safe Harbor 401(k) Plans.

Safe Harbor Notice Requirements

Plans that use a matching contribution to satisfy Safe Harbor requirements must provide an annual notice to eligible employees. However, plans that use only a non-elective contribution are no longer required to provide an annual Safe Harbor notice. If required, the notice must be provided to employees 30 to 90 days before the start of the plan year and should include:

1. Contribution Information: Whether the employer will make a matching Safe Harbor contribution, along with any additional contributions made under the plan.
2. Deferral Information: Information on how employees can make salary deferral elections, as well as the timing of when they can elect a new deferral amount.
3. Vesting and Withdrawal Information: Explanation of how employees can become vested and how they can access their funds.
4. Plan Details: Information on how employees can obtain additional plan information, such as a copy of the Summary Plan Description.

Failure to Provide Safe Harbor Notice: Scenarios and Corrections

If the Safe Harbor notice was not provided in a timely manner (and the plan uses a matching contribution), an operational error has occurred. The required correction depends on how the error affects the individual participant. Note that safe harbor provisions generally cannot be added retroactively during the plan year as a means of correction.

A failure to provide the Safe Harbor notice typically occurs in two different scenarios:

Scenario 1: Administrative Failure

If the employer fails to provide the notice to an employee who was previously eligible for the plan, the error is generally considered administrative. In this case:

• Corrective Action: No employee impact occurred, as the employee was informed about the plan’s features and their opportunity to participate. The correction here involves revising procedures to ensure that the error does not happen again in the future.

Scenario 2: Failure to Notify a Newly Eligible Employee

If a new employee becomes eligible to participate in the Safe Harbor 401(k) plan but does not receive the notice, the employer has failed to provide the employee an opportunity to make a salary deferral election. In this case:

• Corrective Action: The employer must make two corrective contributions to the employee’s account:
  1. One contribution to fulfill the required Safe Harbor contribution.
  2. A second contribution to address the missed deferral opportunity. This is typically a Qualified Nonelective Contribution (QNEC) and is calculated based on an estimate of the deferrals the employee would have made. If the employee did not make an affirmative deferral election, the missed deferral amount is based on the Actual Deferral Percentage (ADP) for their group (HCE or NHCE) multiplied by their compensation. The QNEC amount is generally 50% of the missed deferral, but under Rev. Proc. 2021-30, it may be reduced to 25% or even waived if the error is corrected promptly and certain conditions are met.

How to Prevent the Common Safe Harbor Notice Error

• Review Procedures: Ensure that your plan’s procedures for providing timely Safe Harbor notices are thorough and up to date.
• Keep Detailed Records: Maintain comprehensive records regarding when and how Safe Harbor notices were distributed to eligible employees.
• Ensure Participation: Verify that eligible employees, especially those not actively participating, received timely notice of their eligibility to participate in the Safe Harbor 401(k) plan.

For Assistance with Correcting Safe Harbor Notice Errors

If you need help correcting a Safe Harbor notice error, contact Ekon Benefits at (314) 367-6555 or info@ekonbenefits.com.