It may be advantageous for a plan sponsor to consider adopting a traditional safe harbor design for their retirement plan. Adopting a safe harbor retirement plan design permits an employer to essentially avoid discrimination testing (the testing is deemed met). Remember, this testing limits highly compensated employees’ contributions based upon non-highly compensated employees’ contributions. By making a safe harbor contribution highly compensated employees can defer the maximum amount allowed by their plan and Internal Revenue Code limits, without receiving any refunds. General rules for all safe harbor contributions include the following:

  • Safe harbor contributions are 100 percent vested.
  • There may be no allocation requirements imposed on safe harbor contributions, for example, a 1,000-hour service requirement or a last day employment rule.
  • Safe harbor contributions may be used toward satisfying the top heavy plan minimum contribution requirement.
  • All eligible participants must receive a written notice describing the applicable safe harbor provisions between 30 and 90 days before the beginning of the plan year. This notice must be provided for each year the plan will be safe harbored unless the plan is going to elect safe harbor treatment after commencement of the plan year and utilize nonelective contributions to meet the safe harbor contribution requirement per the SECURE Act, which passed in December, 2019.

Generally, there are two types of safe harbor contributions:

  1. The non-elective contribution, which is a 3 percent contribution to all eligible participants (or 4 percent if safe harbor is going to be elected later than 30 days prior to plan year end, in accordance with the SECURE Act), or
  2. A matching contribution to participants who are contributing to your plan.

There are two options from which to choose for the matching contribution, either the basic or the enhanced match. The basic safe harbor matching contribution is defined as a 100 percent match on the first 3 percent of compensation deferred and a 50 percent match on deferrals between 3 percent and 5 percent of compensation. Alternatively, the employer may choose an enhanced matching formula equal to at least the amount of the basic match; for example, 100 percent of the first 4 percent deferred. All that said, employers wishing to explore a safe harbor solution should also be aware that it may entail more cost if their present contribution structure is less than the required safe harbor required structure.

Alternatively, a plan can adopt a qualified automatic contribution arrangement (QACA) design and receive the same safe harbor benefits with automatic enrollment and escalation features. To learn if a traditional safe harbor feature is appropriate for your plan, or to explore the workings of QACA, contact your plan advisor.


A partial plan termination is presumed by the IRS to occur when 20 percent or more of a company’s employees are no longer eligible to participate in the plan in a determined span of time (typically one plan year, but it can be other spans of time based on facts and circumstances). Routine turnover during the year is generally not considered a partial plan termination.

To determine whether your turnover rate is routine, consider the following factors:

  • What was your turnover rate during other periods and what was the extent to which terminated employees were actually replaced?
  • Do the new employees perform the same functions as the previous employees? Do they have the same job classification or title? Do they have comparable compensation?

There is no requirement to notify the IRS of a partial plan termination, but all affected employees must be 100 percent vested in their account balance as of the date of their termination. If this hasn’t happened, a Voluntary Correction Program would be appropriate. For more information on partial plan terminations, please contact your plan advisor.


Managing uncashed retirement checks may be considered a nuisance by plan administrators. Nevertheless, the employer still has fiduciary responsibility when a former employee fails to cash their distribution. Search efforts to locate a missing plan participant consume time and money and may fail to locate the participant. Likewise, going through the process of turning over dormant accounts to the state can also consume time and resources.

Decrease the burden of uncashed checks by:

  1. Discussing with terminating employees during the exit interview the options for their retirement plan. They may forget they have a company-sponsored retirement plan, or don’t know how to manage it.
  2. Reminding departing employees that they can roll over their retirement assets into their new employer’s plan. Your plan’s service provider or the new employer can answer questions the former employee may have about the rollover process.
  3. Letting employees with an account balance of $1,000 or less know they should expect to receive a check in the mail after a certain amount of time.
  4. Having the employee verify their current address to where the check can be sent. 

Remember, fiduciary responsibility and liability extends to terminated employees with assets in the plan. This responsibility includes delivery of all required distributions and all fiduciary prudence responsibilities. It’s very important to stay in touch with this important group.


Retirement planning can often seem complicated and daunting. Really, though, most of the actions you need to take to work toward a confident retirement are very simple.

Follow a Plan
Successful investors have a plan and they stick to it. You have access to a qualified plan like a 401(k). With that comes access to educational materials and often, personalized information about saving for retirement. Creating a retirement plan, assessing risk tolerance, and setting up an asset allocation are easy steps to take toward retirement, and can always be readjusted later as circumstances change.


Focus on Saving More than Spending
Saving as much as possible is one of the most important steps for you to take. You should strive to live below your means and save the remainder. A qualified plan makes saving easy, since the money comes out before you receive it. Someone who starts saving 3 percent of income and increases that by 1 percent every six months will be saving 13 percent in five years.


Maximize Matching
If your qualified plan matches contributions, you should take full advantage of it. In this situation, the top priority is to contribute enough to get the maximum matching contribution. This “free money” can add tens of thousands of dollars to your retirement portfolio.


Seek Tax Deferred Retirement Plans

Tax-deferred plans are another huge boon to retirement savings. Money is contributed to the plan before taxes, and continues to grow and compound free of taxes, until withdrawal. This means that funds that would normally have gone to the government stay in your retirement account, boosting returns.


  • Last December, President Trump signed into law the “Setting up Every Community for Retirement Enhancement (SECURE) Act” (gotta love the name).
  • Although the most significant law affecting retirement plans in many years, all in all, it is a modest piece of legislation, as compared to prior laws such as Pension Protection Act of 2006 and the Tax Reform Act of 1986.  It is really a hodge podge of policy initiatives that have been bouncing around the halls of Congress in recent years.
  • The stated concerns of Congress in enacting this legislation are that almost half of the American work force is not covered by an employer sponsored retirement plan and many of those who are covered are not saving enough to provide adequate income in retirement.
  • Some of the provisions in the SECURE Act reduce or defer federal tax revenues. To pay for this the taxation of inherited IRAs is changing. Under current law, individuals who inherit an IRA may elect to take distributions based on their life expectancy which can be many years.  Going forward, non-spouse beneficiaries must take all distributions from an inherited IRA within 10 years. This change does not affect individuals who inherit an IRA from their spouse.
  • One of the most important changes in the SECURE Act is removing a major stumbling block to offering annuities in 401(k) plans.
  • Only about 10 percent of 401(k) plans currently offer an annuity as an investment option. One of the main reasons for the reluctance to offer annuities is the potential fiduciary liability if the provider becomes insolvent, which may occur many years after the provider is selected.
  • The SECURE Act provides for a safe harbor that relieves plan fiduciaries of potential liability in regards to selection of annuity provider. This does not excuse plan fiduciaries from making a prudent and well considered decision in the initial selection and monitoring the provider ongoing. Additional guidance will be issued by the Department of Labor regarding the requirements to gain such protection.
  • The upside to including annuities in 401(k) plans is this offers participants an investment option that will provide a steady stream of income in retirement. This has become a greater concern in recent years as the American population ages and plan participants move from the accumulation phase into retirement. The concern is that annuities are complex and expensive, and the fees can be difficult for the average investor to discern.
  • Notwithstanding the potential complexities of annuities, participants who decide to invest in an annuity will probably be better off if the plan fiduciaries select the annuity provider, as opposed to participants rolling their account to a brokerage firm and then purchasing an annuity which frequently occurs under current law.
  • The SECURE Act makes a second important accommodation for offering annuities in plans. Where a plan sponsor eliminates a lifetime income option, the Act permits individuals to transfer this investment to another plan or to an IRA.
  • At present a few record keepers include on participant statements an estimate of the monthly income a participant’s account might generate. Often this estimate is based on a projected account balance at retirement.
  • The SECURE Act requires an annual disclosure on participant statements of the estimated monthly income a participant’s accrued benefit might produce in the form of a either a single life annuity or, if married, a joint
    life annuity.
  • The Department of Labor is directed to develop standards for making life time income projections. The Department has a year to develop these standards. This notice does not have to be provided to participants until after these standards are published.
  • The SECURE Act increases the age at which minimum required distributions (MRDs) must commence.
  • The MRD rules are designed to prevent individuals from effectively using retirement plans and IRAs for estate planning and deferring income taxes on retirement benefits until the next generation. This rule requires individuals to begin taking distributions each year based on life expectancy and paying income taxes on these distributions. Under current law, for retirement plans, MRDs must commence in the year individuals reach age 70½, or if later, the year the individual retires. For IRAs, it is always the year the individual attains age 70½. The Act pushes this back to the year individuals reach age 72.
  • WARNING – This change is effective for individuals who do not reach age 70½ until 2020. Individuals who reached age 70½ in 2019 must take their first MRD April 1st, 2020.
  • The SECURE Act allows individuals to make tax deductible contributions to IRAs after age 70½. Under current law, only Roth contributions are permitted after age 70½. This change takes effect immediately and allows deductible contributions for 2019.
  • Current law allows plan sponsors to exclude part time workers who work less than 1,000 hours a year. The SECURE Act requires sponsors to allow “long term” part time workers to participate in their retirement plans. A “long term” part time worker is someone who works at least 500 hours in three consecutive years.
  • Employers are only required to offer these part time workers the opportunity to defer and do not have include these workers in any company contributions. These part time workers may be excluded from
    discrimination testing.
  • Practically speaking, this provision is not effective till 2023 as it does not require employers to begin tracking part time workers until 2021.
  • The existing tax credit of $500 to encourage small employers to set up plans will increase to $5,000 per year for the first three years.
    • There is an additional tax credit of $500 for small employers that add an automatic enrollment feature to
      their plan.

    Multiple employer plans

    Defined contribution (DC) plans

    Plan years beginning after 2020

    Tax credits to encourage small employers to set up plans

    Qualified plans (e.g., 401(k) plans), SIMPLE IRA and Simplified Employee Pension (SEP) plans

    Tax years beginning after 2019
    Credit for small employers that add automatic enrollment 401(k) and SIMPLE IRA plans Tax years beginning after 2019
    Participation by long-term part- time employees 401(k) plans Plan years beginning after 2020
    Lifetime income disclosure on participant statements DC plans 12 months after the DOL provides guidance
    Fiduciary safe harbor for selecting insurer to provide lifetime income

    DC plans

    Date of enactment–December 20, 2019
    Portability of lifetime income options DC, 403(b) and 457(b) plans Plan years beginning after 2019

    Increase in the automatic escalation cap to 15% in the automatic enrollment safe harbor

    401(k) plans

    Plan years beginning after 2019

    Simplification of the rules for nonelective safe harbor 401(k) plans

    401(k) plans

    Plan years beginning after 2019

    Penalty-free withdrawals for birth or adoption expenses Qualified DC plans, 403(b) plans and IRAs Distributions made after 2019
    Increase in the age when distributions must begin Qualified plans, traditional IRAs, 403(b) and 457(b) plans Individuals who reach age 70 ½ after 2019
    Changes to the required minimum distribution rules for nonspouse beneficiaries Qualified DC plans, traditional and Roth IRAs, 403(b) and 457(b) plans Effective with respect to participants and account holders who die after 2019
    Permit traditional IRA contributions after 70 ½ Traditional IRAs Contributions for tax years beginning after 2019
    Expand tax-free distributions from 529 plans 529 college savings plans Distributions made after 2018

    Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Lutz Financial (“Lutz”), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Lutz.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Lutz is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice.  A copy of the Lutz’s current written disclosure Brochure discussing our advisory services and fees is available upon request. Please Note: If you are a Lutz client, please remember to contact Lutz, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. Lutz shall continue to rely on the accuracy of information that you have provided.

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