Employees rely on a solid 401(k) plan for its tax-advantages in saving for retirement. For employers, selecting and managing the right 401(k) plan may seem challenging.

Staying Compliant
Companies who want to offer 401(k) savings plans to their employees must ensure their plans strictly follow the rules and stay compliant. Key 401(k) regulations require employees to undergo annual nondiscrimination tests to prove a plan doesn’t unfairly favor certain employees over others. Falling out of compliance may lead to significant headaches and financial consequences, which is why so many businesses turn to adding a Safe Harbor provision to their 401(k)s.

What is a Safe Harbor 401(k) and how does it benefit my company?
Safe Harbor 401(k)s have become one of the most popular retirement plans in large part because they automatically pass the annual Actual Deferral Percentage (ADP) test, the Actual Contribution Percentage (ACP) Test, the top heavy test and the coverage test. These tests analyze the actual deferral percentage and actual contribution percentage and review the savings rates of highly compensated employees as compared to other employees. For 2019, employees earning more than $125,000 are considered highly compensated employees.

Selecting a Safe Harbor provision for your 401(k) enables owners to avoid these IRS annual compliance tests, maximize contributions to the plan, and ensure equal benefits and access for all employees regardless of their salary level. They differ from traditional plans in that employers are required to make annual contributions (on behalf of employees) which are immediately vested.

Avoid Corrective Distributions (Refunds)
Highly compensated employees and owners of business are never happy when they have been making contributions all year to their 401k and then find out that their company’s 401k plan has failed a test and because of the failure the employee has to receive part of their contribution. The reason for the refund is to being the 401k back into compliance.

Types of Safe Harbor Provisions

Here are the minimum requirements. You must meet ONE of the following to be considered a legal safe harbor plan:

  • Enhanced Safe Harbor Elective Match: Company matches 100% of all employee 401(k) contributions, up to 4% of their compensation. Employees are required to defer money to their 401(k) in order to qualify for the match, OR
  • Elective (basic match): Company matches 100% of all employee 401(k) contributions up to 3% of their compensation, plus a 50% match of the next 2% of their compensation, OR
  • Non-elective Safe Harbor: Company contributes 3% of each employee’s compensation, regardless of whether the employee also makes contributions

Benefits of a Safe Harbor provision in your 401(k)

    • Helps your company stay in compliance as it exempts your 401(k) plan from most annual compliance testing
    • Aids in recruiting, rewarding, retaining and engaging employees
    • Increases the likelihood that you and your highly compensated employees will max out your annual retirement contributions
    • Employer contributions reduce your taxable income

How do you make your plan a Safe Harbor 401k?

Contact your third party administrator and ask them to review the employee census data to see which one of the 3 options fit your needs. At the same time have them prepare a plan amendment.

With Safe Harbor 401(k) plans, the employer contributions are required each year and are immediately 100% vested. To be effective by January 1, Safe Harbor provisions must be established by October 1.

Employers looking to convert or open a Safe Harbor 401(k) plan should turn to a professional financial advisor who can guide them through the process and help them determine how a retirement plan fits into their company’s overall objectives and financial goals. If you have questions or would like more information on whether a Safe Harbor 401(k) may be right for your company, send us an email at info@rubinwa.com.

Let's get to know one another.

    Which best describes you?

    I'm just getting started and have questions.I'm interested in improving our current plan.I'm looking for employee education or support.I'd like to learn more about staying in compliance.

      Which best describes you?

      I'm just getting started and have questions.I'm interested in improving our current plan.I'm looking for employee education or support.I'd like to learn more about staying in compliance.