Offering a 401(k) plan makes it easy for employees to save for retirement but adds administrative and compliance burdens to the employer. One approach to simplify the administrative burden is to implement or switch to a safe harbor plan.
What is a Safe Harbor Retirement Plan?
Like a traditional 401k plan, a safe harbor 401(k) plan offers employees the same pre-tax deferral benefit. However, there are some notable differentiators. Generally, regulations require that 401(k) plans undergo annual IRS nondiscrimination testing. This testing ensures the plan treats all employees fairly, not just the business owners and highly compensated employees. A safe harbor 401(k) plan automatically passes IRS Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP) and top-heavy nondiscrimination testing. Passing the nondiscrimination testing allows all participants, including highly compensated employees (HCE), to fully contribute to the maximum IRS limits. In exchange for the automatic test pass, the employer must provide a guaranteed employee contribution. These are typically provided as a match or a non-elective contribution. In addition, safe harbor contributions are immediately fully vested, meaning they are 100% employee-owned at the time of contribution.
Safe Harbor Plan Match Formulas
Employer matches 100% of the first 3% of employee deferrals, plus a 50% match on the next 2% of deferred compensation. The total employer contribution would not exceed 4% of an employee’s compensation.
- Employer contributes 3% or more of each employee’s compensation, regardless of the employee’s elective contributions.
Why offer a Safe Harbor plan?
To provide a competitive employee benefit that can help your company attract and retain talent and encourage plan participation.
Contributions made by the employer are tax deductible which reduces the employer’s taxable income.
- Safe harbor plans automatically pass IRS Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP) nondiscrimination and top-heavy testing.
- Passing the IRS nondiscrimination testing allows all participants, including highly compensated employees (HCE), to fully contribute to the maximum IRS limits. This means no refunds for overcontributing HCEs.
- An employer match incentivizes employee to contributions helping them reach financial security.
As 2021 is coming to a close, this is an excellent time to consider switching your 401(k) plan to a safe harbor 401(k) plan. There are implementation timing deadlines, formula decisions, and other factors to consider with safe harbor plans. You are a likely candidate ff you have a top-heavy plan, recently failed compliance testing, or have been forced to refund HCE contributions. Please reach out if you would like to discuss safe harbor plan options or see how a safe harbor plan would benefit your company and your employees.