Safe Harbor Profit Sharing Formula

With the non-elective, profit sharing contribution, the safe harbor is met by the employer making a required profit sharing contribution to a defined contribution plan on behalf of each non-highly compensated employee eligible to participate in the plan. The contribution amount must be equal to at least three percent of the employee’s compensation. The three percent (3%) contribution must be fully vested, but may also be used to satisfy the top-heavy minimum contribution requirements of Code Section 416 and to satisfy the ADP test.

Safe Harbor Matching Formula

Under the matching contribution method, the safe harbor requirements can be met by a matching contribution under either:

1. A basic matching formula; or
2. An enhanced matching formula.

Under the basic matching formula, the following requirements must be met in a specific manner, namely:

1. The employer must make a matching contribution on behalf of each eligible non-highly compensated employee by utilizing one of the following formulas:
a. 100% of the employee’s elective (salary deferral) contribution up to three percent of compensation; and 50% of the employee’s elective contribution from three to five percent of compensation; OR
b. 100% of the employee’s elective (salary deferral) contribution up to four percent of compensation;
2. The matching contribution rate for any elective contribution of a highly compensated employee cannot be greater than that for any non-highly compensated employee.

Here again, market research has established the safe harbor method as a cost efficient method for both larger and smaller companies to enhance highly compensated employee benefits while still providing a substantial benefit for the non-highly compensated rank & file employees.