According to the Internal Revenue Service (IRS) rules, a Safe Harbor 401(k) plan requires the plan sponsor/employer to provide notice to employees who are eligible under a qualified Safe Harbor 401(k) plan of their rights, obligations, and benefits under the plan.
The Safe Harbor notice should be provided to eligible employees within a reasonable time before the beginning of the plan year or during the year in which the employee becomes eligible. Generally, this means at least 30 days before the beginning of each plan year, but no earlier than 90 days (between the beginning of October and December 1).
The timely notice is required to allow eligible participants to decide if they want to make or change their 401(k) elective deferrals based on the employer provided benefit they will receive if they make or change an elective deferral. The benefit to eligible employees comes in the form of a 401(k) matching contribution, based on the eligible employee elective deferral and eligible compensation, and/or in the form of a non-elective contribution based on the eligible employee’s eligible compensation.
Employers must provide written or electronic notice so eligible employees can make a timely decision. This notice should include the following details:
- How to obtain information about the plan including the Summary Plan Description;
- How the Eligible Employee can make contributions to the (cash or deferred elections);
- What type of Safe Harbor Contributions the Employer will make to the Plan (matching or non-elective);
- The definition of Eligible Compensation used by the Plan;
- Other features of the plan, such as time period, to make cash or deferred elections, withdrawal, distribution, vesting provisions of the Plan.
If employers do not follow the rules for timely notice to eligible employees about their rights, obligations, and benefits under the Safe Harbor 401(k) plan, there may be significant financial burdens for employers including funding 50% of a missed deferral opportunity in addition to the employer match or non-elective contribution, plus estimated earnings. If the failure to provide notice did not prevent the eligible employee the opportunity to make or change his/her election to the plan, then this may be considered an administrative issue that needs to be addressed that would not require a corrective action.