What is a Safe Harbor 401(k) Plan?
A safe harbor 401(k) plan is a popular retirement plan for small businesses. To qualify as a safe harbor 401(k), there are two requirements: a mandatory contribution and participant notices. By fulfilling these two requirements, the plan can automatically pass annual nondiscrimination testing. This flexible plan is an attractive type of 401(k) used by small businesses today because it allows owners to contribute up to IRS limits with no concerns of receiving refunds of their contributions if there were to be testing problems.
There are many reasons companies are switching to a safe harbor 401(k) plan, including failure of previous nondiscrimination or compliance tests, wanting to contribute more without risk of nondiscrimination testing failure, or a company is required to make contributions to keep plans compliant.
Benefits of Safe Harbor 401(k) Plans
Safe harbor 401(k) plans automatically pass key nondiscrimination tests by fulfilling basic requirements.
For small companies with top heavy 401(k) plans, a safe harbor plan may be best suited, as safe harbor 401(k) plans normally automatically pass the top-heavy testing. A top heavy 401(k) plan is a plan where the “key-employees” own more than 60% of the value of the plan assets. (please note – there are a few exceptions to the automatic test pass rule)
Safe harbor 401(k) plans are designed to have a fixed and mandatory contribution and, in most cases, required to be immediately 100% vested, but the employer does have a range of options within a safe harbor plan.
The required employer contributions offer a generous retirement benefit to employees – which may aid in recruiting and retaining of employees.
Thinking About Starting a Safe Harbor 401(k)? The SECURE 2.0 Act Added Additional Benefits for a Variety of Retirement Plans – Including Safe Harbor 401(k) Plans
Companies may be able to benefit from small business tax credits. The SECURE 2.0 Act has modified tax credits for small businesses with up to 50 employees. Employees may be eligible for a tax credit to cover 100% of plan start-up costs for a workplace plan (up from 50%) capped annually at $5,000 per employer (which remains unchanged) for each of the first three years. Eligible businesses with 51 to 100 employees are still subject to the original SECURE Act’s tax credits equal to 50% of administrative costs, capped annually at $5,000 per employer for three years. Small businesses may also claim an additional $500 tax credit per year for a three-year period by adding an automatic enrollment feature to either a new or existing 401(k) plan. In total, this could save $16,500 over three years.
Safe harbor match – With a basic safe harbor match, a company will match 100% of contributions up to 3% of the employee’s annual compensation, plus 50% on the next 2%. Employees would have to contribute 5% to receive a 4% match. With an enhanced safe harbor match, typically an employer will match 100% of contributions on 4% of an employee’s annual compensation but cannot exceed 6% total.
Non-elective safe harbor – With this plan, all eligible employees will receive a 3%, or more, employer non-elective contribution, regardless of whether the employees make salary deferral contributions to the plan.
QACA safe harbor (Qualified automatic contribution arrangement) – With a QACA safe harbor match, employers match 100% of the first 1% of compensation, plus 50% on the next 5% of compensation (3.5% total). With a QACA safe harbor non-elective, it is the same as a traditional non-elective safe harbor, employees receive at least a 3% employer non-elective contribution. The unique feature with a QACA safe harbor match or non-elective is that you are allowed to have a vesting schedule.
All safe harbor 401(k) plans, regardless of type, are set up for companies to commit to for one year with strict deadlines. There are certain changes that are permitted to the plan mid-year. Employees can contribute up to $22,500 (or $30,000 if they are 50 or older) from their salary per year.
Find Out More About Safe Harbor 401(k) Plans
Choosing the best plan for a business comes down to the retirement plan goals, how much the plan sponsor wants to save and whether the plan is being set up specifically to attract and retain employees. Retirement Plan Consultants (RPC) is an established retirement plan provider that offers safe harbor 401(k) plans for small businesses. Our sales team is available to put together a customized plan for companies. Contact us to maximize tax savings by offering a safe harbor 401(k) plan.