Missed the Safe Harbor Deadline? There’s a Way!

A Missed Deadline Doesn’t Always Mean a Missed Opportunity

Compared to simplified retirement programs such as SEP and SIMPLE IRAs, 401(k) plans bring a host of additional benefits and features. They offer tax diversification by way of the Roth 401(k), a mechanism to convert pre-tax balances to Roth (internal conversions), in-case-of-emergency access in pre-retirement, and creditor protection under Title I of ERISA without having to rely on the Bankruptcy Act of 2005. To encourage retention, employer can attach a vesting schedule to contributions made by the company, such as match or profit sharing.

Special Handling To enjoy tax-preferred status, 401(k) plans perform annual testing (ADP test) in which salary deferral amounts of the non-highly compensated employees (NHCEs) are compared to those of the highly compensated employees (HCEs). Too great a disparity requires a special contribution to NHCEs or reversal of a share of HCE deferrals to bring the plan in balance. A similar test applies to matching contributions (ACP test).

A Safe Harbor Approach To break through the limits often imposed by these two tests, retirement plans often utilize Safe Harbor provisions. Safe Harbor 401(k) plans require the employer to make either a 3% contribution for all eligible employees or a match for those who choose to defer. Safe Harbor 401(k)s automatically pass their ADP and ACP tests.

The Deadline Some special rules do apply. Safe Harbor plans require that employees have a 60-day window to enroll into the plan. In addition, one needs a full month’s payroll after the enrollment window but before year end to make a salary deferral, making October 1 the last day for calendar-year businesses to establish a Safe Harbor 401(k).

Missed the Deadline? If a business wants to start a 401(k) plan but missed the October 1 implementation deadline, there is a way. A special rule available only for new 401(k) plans comes to the rescue. This rule allows the HCEs to defer 5% of salary and receive a match without fear of ADP or ACP test failure. The plan must be established before 12/1 and implement Safe Harbor provisions on January 1 of the New Year to take advantage of this opportunity.

Here’s how it worked for one of the companies we recently helped:


  • Consulting business
  • S-corporation; two owners: husband and wife
  • Four employees (three eligible in 2016)
  • No plan
  • Contribution objective: $60,000 – $80,000 plus employee contribution

First Plan Year

Recommendation: establish a 401(k) plan with a discretionary match and profit sharing.

Age W-2 Salary Deferral Discretionary Match Profit Sharing Total $
Owner 1 54 $160,000 $6,000 $6,000 $47,000 $59,000
Owner 2 48 $43,808 $4,187 $2,190 $3,395 $9,772
Employee 1 50 $37,850 $0 $0 $1,892 $1,892
Employee 2 23 $1,999 $0 $0 $0 $0
Employee 3 36 $25,863 $0 $0 $1,293 $1,293
Employee 4 26 $18,064 $0 $0 $903 $903

Second Plan Year

Recommendation: Since the 5% rule is available only in the first plan year, add a Safe Harbor match to protect the deferral and matching contribution opportunity for the highly-compensated employees even if other participants choose to defer little or not to make salary deferral contributions at all.

Age W-2 Salary Deferral Safe Harbor  Match Discretionary Match Profit Sharing Total $
Owner 1 55 $160,000 $24,000 $6,400 $6,400 $22,200 $59,000
Owner 2 49 $43,808 $18,000 $1,752 $1,752 $1,314 $22,818
Employee 1 51 $37,850 $0 $0 $0 $1,892 $1,892
Employee 2 24 $1,999 $0 $0 $0 $0 $0
Employee 3 37 $25,863 $0 $0 $0 $1,293 $1,293
Employee 4 27 $18,064 $0 $0 $0 $903 $903

In the current year, the plan will allow the owners to save up to $68,772 with employee contribution of a little over four thousand dollars. Next year, with implementation of the Safe Harbor match provision, their contribution opportunity will increase to close to $82,000 with the required contribution for employees remaining at the same level as in year one.

Who May Benefit from This Approach

  • Businesses that missed the safe harbor deadline but want to start a 401(k) plan in the current year;
  • Businesses with Profit Sharing Plans that would like to add a 401(k) feature in the current year;
  • Businesses with a SEP IRA that want to benefit from flexibility and efficiency available in a 401(k) plan