Top Five Questions about Safe Harbor Plans

A safe harbor defined contribution plan provides employers with several key benefits, including automatically passing the ADP, ACP and possibly top heavy tests, and the ability to maximize the deferral amounts for highly compensated employees (HCEs).  To qualify as a safe harbor plan, the plan does need to meet certain contribution, vesting and participant notification requirements.

While these advantages have led many plan sponsors to adopt a safe harbor plan, it may not be the best decision for every employer.  If you are considering making your plan a safe harbor plan, you should consider several important questions.

1.     What are the potential disadvantages of a safe harbor plan?

Since a safe harbor plan is subject to special contribution and vesting requirements, these mandates might make a safe harbor plan more expensive than a traditional plan.

For instance, the employer, under a safe harbor plan, must make either eligible matching or nonelective contributions to participants, using one of the below options.

  • Safe harbor matching contribution: either a
    • Basic match: 100% match on the first 3% of deferred compensation, plus a 50% match on deferrals of over 3% and up to 5%; or
    • Enhanced match: A match that is at least as generous as the basic match at any level of employee deferral.
  • Non-elective contribution:  A minimum of 3% of an eligible employee’s annual compensation, even for employees that do not make contributions.

Unlike traditional plans that typically employ a vesting schedule for employer matching contributions, all contributions in a safe harbor plan are vested 100% immediately.  Thus, no contributions will return to a plan upon termination of an employee.

2.     Are there other options to the above approach?

Safe harbor protections can now also be achieved by adopting a Qualified Automatic Contribution Arrangement (QACA).  A QACA has an automatic enrollment component that will enroll any eligible employee that does not take affirmative action to join the plan.

There are special requirements for a QACA, including:

  • The plan must provide for automatic enrollment and the initial automatic deferral rate must be no less than 3% and increase at least 1% annually to no less than 6%.
  • QACA Safe harbor matching contribution: either a
    • QACA Basic match100% match on the first 1% of compensation deferred and a 50% match on deferrals between 1% and 6%; or,
    • QACA Enhanced match—A match that is at least as generous as the QACA basic match at any level of employee deferral.
    • Or, a QACA Non-elective contribution: A minimum of 3% of an eligible employee’s annual compensation, even for employees that do not make contributions.
  • The plan must provide for a default investment alternative for those automatically enrolled.
  • QACA contributions can be put on a 2-year cliff vesting schedule.

3.     Are there special administrative requirements of a safe harbor plan?

There are two things that employers who want to adopt safe harbor plans must do, including:

  • Amend their existing plan to include safe harbor provisions and sign the plan document amendment prior to the start of the plan year for which the safe harbor is effective; and
  • Provide notification to participants of these safe harbor provisions 30 to 90 days before the start of each plan year, and at the time employees become newly eligible to participate in the plan.

Otherwise, a safe harbor plan must follow the same operational and plan provision requirements of a traditional qualified retirement plan.

4.     Can discretionary profit-sharing contributions be made to a safe harbor plan?

Yes, though they must satisfy 401(a)(4) testing.

5.     Is a safe harbor plan more cost-effective?

There is no simple answer to this question.  It will depend on a variety of factors specific to your circumstances, such as a plan’s employee deferral experience, current administrative and testing costs and the potential cost of corrective action if participant notification requirements are not met.


Plans that are not currently operating with a Safe Harbor plan design may wish to consider switching to a Safe Harbor plan design.

Existing plan sponsor clients wishing to become Safe Harbor plans for a future calendar year must notify their PNC Account Manager by the November 1, 2017, deadline.

Confirm the Safe Harbor Plan Design Each Year

Every year, plan sponsors must decide whether to continue to use a Safe Harbor plan design. Plans currently designated as Safe Harbor plans must notify their Account Manager of their intent to maintain Safe Harbor status (or not) for a future calendar year by mid-November.

PNC Retirement Solutions does not provide legal advice and employers are encouraged to consult with ERISA counsel regarding the safe harbor status of their plans.

Inside Vested Interest®

Return to Current Issue »

To Subscribe

E-mail Us »

Important Legal Disclosures and Information

The material presented in this newsletter is of a general nature and does not constitute the provision by PNC of investment, legal, tax, or accounting advice to any person, or a recommendation to buy or sell any security or adopt any investment strategy. Opinions expressed herein are subject to change without notice. The information was obtained from sources deemed reliable. Such information is not guaranteed as to its accuracy.

The PNC Financial Services Group, Inc. (“PNC”) uses the marketing name PNC Institutional Asset Management® for the various discretionary and non-discretionary institutional investment activities conducted through PNC Bank, National Association (“PNC Bank), which is a Member FDIC, and through PNC’s subsidiary PNC Capital Advisors, LLC, a registered investment adviser (“PNC Capital Advisors”). PNC Bank uses the marketing names PNC Retirement Solutions® and Vested Interest® to provide defined contribution plan services and PNC Institutional Advisory Solutions® to provide discretionary investment management, trustee, and other related services. Standalone custody, escrow, and directed trustee services; FDIC-insured banking products and services; and lending of funds are also provided through PNC Bank. PNC does not provide legal, tax, or accounting advice unless, with respect to tax advice, PNC Bank has entered into a written tax services agreement. PNC does not provide services in any jurisdiction in which it is not authorized to conduct business. PNC Bank is not registered as a municipal advisor under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Act”). Investment management and related products and services provided to a “municipal entity” or “obligated person” regarding “proceeds of municipal securities” (as such terms are defined in the Act) will be provided by PNC Capital Advisors.

“Vested Interest,” “PNC Institutional Asset Management,” “PNC Retirement Solutions,” and “PNC Institutional Advisory Solutions” are registered service marks of The PNC Financial Services Group, Inc.

Investments: Not FDIC Insured. No Bank Guarantee. May Lose Value.