What is a Safe Harbor 401(k) Plan?

There are numerous 401(k) plan alternatives available to employers, each characterized by unique advantages, contribution structures, and general incentives. The Safe Harbor 401(k) plan is a widely appealing option that allows employers to circumvent annual IRS testing, as well as maximize retirement plan contributions for HCEs and stakeholders. To get familiar with the details of a Safe Harbor 401(k), see the information below, as provided by Ubiquity.

Understanding the Safe Harbor 401(k) Plan

One distinguishing trait of the Safe Harbor 401(k) plan is the employer’s ability to bypass the stress of specific annual IRS (Internal Revenue Service) tests. These tests are carried out to determine the level of fairness exercised in the administration of retirement plans within a given company.

Specifically, they ensure that employers do not discriminate against employees who earn less than HCEs and individuals with a 5% or greater stake in the company. (Highly Compensated Employees, or HCEs, refers to anyone in the business that earns more than $130,00 in annual wages.) Such tests include the:

  • Actual Deferral Percentage (ADP) Test
  • Actual Contribution Percentage (ACP) Test
  • Top Heavy Test

The Safe Harbor 401(k) is automatically determined to be compliant with such non-discrimination tests, specifically, the ADP and ACP. However, if you violate the standards imposed by any of these three evaluations, you will be subject to a 10% excise tax.

Details of the Safe Harbor 401(k) Plan

Once you commit to implementing this plan for your business, you must immediately vest 100% of the required contributions. There are two primary categories for the contributions you make to this plan.

These include:

  • Matching: This means that you will be matching a pre-determined percentage of each employee’s contributions. This can take two different forms:
    • Basic: Employers match employee contributions dollar-for-dollar up to 3% of their annual wages, with an additional 50% match for the following 2% of subsequent contributions.
    • Enhanced: Employers will match employee contributions dollar-for-dollar up to 4% of their annual wages.
  • Nonelective: Under a nonelective contribution structure, you, as the employer, are required to contribute a minimum of 3% of your employees’ annual compensation, as long as they are eligible.

Once you have chosen this plan, it must remain in effect for an entire year, according to the 12-month plan rule. If you wish to make any additional contributions while the plan is in effect, then they may be required to be vested in the same way the standard contributions are. Any employee who is eligible to contribute to your chosen 401(k) plan is also eligible to receive the Safe Harbor plan’s benefits. This means that they, too, should have access to matching once they initiate contributions.

Suppose you wish to implement Safe Harbor provisions in your existing 401(k) plan. In that case, you must do so by either late November or December 1st, as this must be completed at least 30 days before the start of the next calendar year. On the other hand, those integrating these provisions into brand-new 401(k) plans must do so on or before October 1st, since this must be done at least 90 days before the end of the year. If you do not yet have a plan, review your business’s needs and act quickly, as most brand-new plans should be set up, or at least in the process of set-up, by August 23rd.

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