The many alternatives of the 401(k) retirement plan offer specific advantages that may be more applicable to your business, rather than others. Depending on your company’s particular needs, you may find that the best option is the Safe Harbor plan. Safe Harbor provisions offer employers the opportunity to bypass pesky IRS annual testing and enhance employees’ capacity for 401(k) contributions. To better understand what benefits you may reap from the Safe Harbor 401(k) plan, review the guide below.
What to Know About the Safe Harbor 401(k) Plan
The Safe Harbor 401(k) is perhaps the best option for small businesses with a handful of “key employees” and high-earning staff that want to maximize their retirement funds without the risk of discriminating against workers with lower earnings. This plan has been determined to be automatically compliant with two primary IRS (Internal Revenue Service) tests: the Actual Deferral Percentage (ADP) and the Actual Contribution Percentage (ACP). This alone offers a tremendous advantage, in that you will bypass standard testing and the related administrative burdens.
The key to Safe Harbor contributions, though, is that, unlike Traditional plans, employers are required to make minimum contributions every year. Further, these contributions must be immediately vested in full (meaning that the funds are nonforfeitable). The following contribution formulas are available:
- Basic contributions: Employers are expected to supply 100% matches (dollar-for-dollar) to employee contributions, equivalent to 3% of their gross annual earnings. This is in addition to a 50% match for the following 2% of employee contributions.
- Enhanced contributions: Employers will provide a 100% match to employee contributions, equivalent to up to 4% of their gross annual earnings.
- Nonelective contributions: For all employees, regardless of 401(k) participation, employers should provide a minimum contribution that amounts to 3% of the employee’s yearly wages.
As you can see, the Safe Harbor plan is highly flexible, offering business owners unique advantages in their approach to contributions. Since your business will bypass the standard IRS testing performed each year, you will also have more wiggle room for Highly Compensated Employees (HCEs) and “key employees” (i.e., anyone with a 5% or greater share of the company) to max out their savings.
Deadlines for the Safe Harbor Plan
If you wish to implement a Safe Harbor 401(k) for your business, the clock is ticking, especially for those who do not yet have a retirement plan established at all. This year’s deadlines for 401(k) plans are as follows:
- October 1, 2020 | For those establishing brand-new 401(k) plans, keep in mind that the Safe Harbor provisions must be implemented for at least three months before the next calendar year. Get in touch with your 401(k) plan provider on or before September 25th, as these plans can take some time to administer.
- November 30, 2020 | If you are looking to add Safe Harbor provisions to an existing plan, you must allow at least 30 days to give your employees proper notice ahead of the change. This deadline allows for that notice before the beginning of the next calendar year.
Note that you cannot make any changes or remove provisions within the mandatory 12-month plan rule. Thus, it is vital that you review all elements of your plan in detail with your provider before committing to a decision.