If your business is in need of a retirement savings plan, you may be overwhelmed with all the options available to you. One of the most common alternatives that business owners choose is the 401(k) plan. This is primarily due to its flexibility in allowing employees to contribute to their post-retirement life with the option of support via employer matching.
One type of 401(k) that takes great advantage of this is the Safe Harbor Plan. By administering this provision into your new or existing 401(k) plan, you open up several options for employee participation and company contributions, along with the benefit of bypassing stressful IRS compliance testing. See the guide below, provided by Ubiquity, to learn more about how a Safe Harbor plan can help your company.
What are the Benefits of a Safe Harbor 401(k) Plan?
A Safe Harbor 401(k) plan is one of the best retirement plan options for small businesses, especially those that have struggled with compliance testing in the past. This plan is considered by the Internal Revenue Service (IRS) to be automatically compliant with annual testing, specifically the following three described below:
- Actual Deferral Percentage (ADP) Test: The percentage that highly compensated employees (HCEs) can contribute to their 401(k) is limited relative to non-HCEs’ contributions. Often, this hits small businesses the hardest.
- Actual Contribution Percentage (ACP) Test: To ensure that employers are not discriminating against lower-earning employees, the IRS checks that contributions to HCEs as compared to non-HCEs do not exceed 125%.
- Top-Heavy Test: Instead of examining contributions, the IRS will evaluate the total plan balance and verify that high-earning employees do not hold more than 60% of the total. (If they do, then your plan does not pass and it’s considered “Top Heavy.”)
Failing these tests is an extremely costly issue, both in terms of time (due to administrative responsibilities involving heaps of paperwork) and money – primarily in the form of the 10% penalties. Fortunately, the flexible matching and contribution options described below guarantee compliance with these standards.
Matching Options in a Safe Harbor 401(k) Plan
There are three primary types of contribution structures you can employ with a Safe Harbor provision. These include:
- Basic Matching: Employers match 100% of employee contributions for the first 3% of deferrals, plus an additional 50% for the next 2%.
- Enhanced Matching: Employers must match 100% of employee contributions for 4-6% of deferrals.
- Non-elective Contributions: Not all employees will want to participate in the company 401(k) plan. With a Safe Harbor provision, that’s just fine. Instead of matching contributions for non-participants, employers will instead contribute at least 3% of the individual’s annual gross salary.
Choosing a Safe Harbor plan is a highly subjective choice that should be considered in-depth according to your business’ and employees’ unique needs. You must spend as much time as necessary discussing the potential caveats and advantages with your 401(k) plan provider, as this plan requires that employers are 100% vested.
This means that, as soon as you administer the Safe Harbor 401(k) plan, all contributions will immediately be dedicated to your employees. In other words, the funds are nonforfeitable. To get started in implementing your Safe Harbor plan, get in touch with a 401(k) plan provider today.