Design-Based Safe Harbors

Many contributory 403(b) retirement plans fail the matching test. For plan years through 2008, there is an alternative method to meet nondiscrimination requirements. Beginning in 2009, contributory plans have to satisfy the matching test. Any contributory plan that meets the requirements of the "design-based safe harbors" will be deemed automatically to meet all the requirements of the matching test without having to actually conduct the test, as long as the plan doesn't allow employees to make after-tax contributions. Noncontributory plans are not subject to the matching test, so the design-based safe harbors do not apply.

To satisfy design-based safe harbors, plans must provide a base employer contribution for all eligible non-highly compensated employees (NHCEs) or must meet employer match requirements.

The design-based safe harbors must generally be satisfied on each day during the plan year. Plans that satisfy these safe harbors are deemed to satisfy all requirements of the matching test with regard to pretax employee and employer matching contributions. Even though a plan satisfies a safe harbor, it must still satisfy minimum coverage and other general nondiscrimination requirements. If after-tax employee contributions are allowed, these are still subject to the matching test.

Safe harbor requirements

The safe harbor requires that all eligible employees must be given a written explanation (intelligible to the average employee) of their rights and duties under the plan. Ordinarily the notice must be delivered before the start of the plan year.

All contributions used to satisfy the safe harbor — including employer matching contributions — must be fully and immediately vested, nonforfeitable, and generally not distributable before the earliest of separation from service, death, disability, plan termination, or attainment of age 59½. A plan must also meet at least one of the three following conditions:

1. All eligible NHCEs must receive nonelective employer contributions of at least three percent of compensation regardless of whether they elect to contribute to the plan themselves, or
   
2. All eligible NHCEs who elect to contribute to the plan must receive employer matching contributions equal to their own up to three percent of the employee's compensation, and equal to half their own between three percent and five percent of compensation; and the rate of matching employer contributions received by any NHCE must not be lower than the matching rate for any highly compensated employee with the same percentage of elective contributions, or
   
3. The rate of an employer's matching contribution does not increase as the rate of an employee's elective contributions increases, and the total employer matching contributions at each rate of elective contributions is at least equal to the amount of matching contribution that would have been made under alternative (2).

Note that plan documents must be amended to include safe harbor provisions before the end of the plan year for which the plan is seeking protection under the safe harbors.