According to the IRS, “A plan is top-heavy when the owners and most highly paid employees (‘key employees’) own more than 60% of the value of the plan assets.” A safe harbor 401(k) that has only elective deferrals and safe harbor matching contributions is generally exempt from being top-heavy.

Are safe harbor 401k plans subject to top heavy testing?

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 than employee deferrals.

Is there a cap on safe harbor contributions?

Safe Harbor contribution limits. In 2021, the basic employee deferral limits for a Safe Harbor plan are the same as any employer-sponsored 401(k): $19,500 per year for participants under age 50, and $26,000 when you include catch-up contributions for employees over age 50 or older.

What happens if a retirement plan is top heavy?

More In Retirement Plans Determine whether your plan is top-heavy for the plan year. If a 401(k) plan is top-heavy, the employer must contribute up to 3% of compensation for all non-key employees still employed on the last day of the plan year.

What makes a plan safe harbor?

A safe harbor 401(k) plan ensures all eligible plan participants receive an employer contribution. In exchange for making the fixed employer contribution, employers get a “pass” on 401(k) non-discrimination testing (one of the checks the IRS puts on 401(k) plans to ensure they’re equitable to all employees).

Are Safe Harbor Contributions 100 vested?

Safe harbor contributions must always be 100% vested. Therefore, these contributions aren’t returned to the employer upon termination of employment.

What is an enhanced safe harbor match?

Enhanced Safe Harbor Match The employer matches 100% of the first 4% of each employee’s contribution. Like a Basic Safe Harbor Match, employees are required to defer money to their 401(k) in order to qualify for the match.

What is the safe harbor limit for 2020?

With a safe harbor 401(k), everyone can contribute up to the $19,500 maximum in 2020, and those age 50 and older can make an additional $6,500 in catch-up contributions. The trade-off is the company has to make mandatory contributions to employee 401(k) accounts, and that money becomes vested immediately.

What is the safe harbor match limit for 2020?

Contributions from your employer, via Safe Harbor match, do not count toward your contribution limit. The total combined employer and employee contribution limit is $57,000.

Does a safe harbor plan have to match catch-up contributions?

Can Safe Harbor catch-up contributions be matched? Depending on the provisions of your plan, your employer may opt to match any catch-up contributions made. Plans that allow for employer matching of catch-up contributions are still subject to the restrictions specified by the plan.

How do you fix a top heavy plan?

To correct a top-heavy allocation failure, the employer must make a corrective contribution on behalf of the employee who received an insufficient allocation in an amount equal to the insufficiency, adjusted for earnings. There is more than one way to correct a vesting failure under EPCRS.

Who is eligible for top heavy minimum contribution?

If the sum of all key employee balances exceeds 60% of the total balances in the entire plan as of the determination date, the plan is top heavy, potentially requiring the plan sponsor to make a minimum contribution for each non-key employee.

What is a top heavy test?

The top-heavy test ensures that qualified retirement plan (QRP) participants identified as “key employees” do not receive a disproportionate amount of benefits when compared to “nonkey employees.” Under Internal Revenue Code Section (IRC Sec.)

Can you terminate a safe harbor plan mid-year?

Safe Harbor Rules While there are exceptions in light of Covid-19, mid-year termination of a safe harbor plan is generally permitted only if it is in connection with certain business transactions or the employer incurs a substantial business hardship.

Can a safe harbor plan exclude employees?

In a word, yes. The safe harbor plan design is intended to provide a minimum level of contributions for all eligible non-HCEs in exchange for the free pass on the ADP test. Your plan document must contain language that specifically excludes HCEs from the safe harbor contribution.

How much can a highly compensated employee contribute to 401k 2021?

To prevent disproportionately large contributions for HCEs, the 401(k) plan rules place a limit on the amount of compensation that may be considered when calculating an employer matching contribution or other contribution that is based on a percentage of compensation. For 2021, this limit is $290,000.