Ubiquity

Safe Harbor 401k Plans

A Popular Solution for Plans that Have to Limit Contributions Made by Business Owners

The Safe Harbor 401k design feature is a popular solution for plans that have to limit contributions made by business owners and other Highly Compensated Employees (HCEs) because lesser-paid workers are not participating in the plan or are saving at lower rates.

 

Under a Safe Harbor 401k plan, if the business owner makes a minimum contribution to the plan, the following occurs:

  • The business owner and other HCEs can contribute any amount up to the annual salary contribution limit without worrying about the contributions of lesser-paid employees
  • A Safe Harbor plan satisfies top-heavy minimum contribution requirements (a plan is top-heavy if more than 60% of the plan assets are in the accounts of HCEs and other key employees)
  • The business can take a tax deduction for employer contributions

Offering a Safe Harbor plan with a guaranteed employer contribution may also help improve participation and saving rates for all employees, and may also help with recruiting and employee retainment.

Schedule Your Free Consultation

Our team is ready to show you how easy saving can be.

What is a Safe Harbor 401k?

A Safe Harbor 401k plan is deemed to pass the two nondiscrimination tests that 401k plans must typically pass to prove that the plan is not providing a more significant benefit to HCEs which guarantee those who earn at least $120,000 per year or who own more than 5% of the company.

  •  The Actual Deferral Percentage (ADP) test: This limits the percentage of compensation that HCEs can defer into the 401k based on the average contribution rates of the non-highly paid employees.
  • The Actual Contribution Percentage (ACP) test: This ensures that the employer matching contributions and any after-tax employee contributions contributed for HCEs are not disproportionately higher as compared to non-highly paid employees.

If a plan is not a Safe Harbor 401k plan and fails either of these tests, the business owner must either return a portion of the contributions made to HCEs or make additional contributions for the lower paid employees. Unfortunately, if the testing failure is not corrected promptly, the business owner will owe a 10% excise tax.

“I am the plan administrator for our company’s Ubiquity 401k plan. I wanted to take a moment to commend Tony and his team. They all are very knowledgeable and have helped me with any question I may have. I have found them friendly and easy to reach either by phone or email.”
- Barb Tews, Meridian Management
Read more testimonials

Employer contribution options

In exchange for getting an automatic pass on the ADP and ACP tests and the extra administrative duties that go with the testing process, business owners must make a minimum contribution to the plan each year—which must be immediately 100% vested (nonforfeitable). Business owners may choose from two contribution options:

Matching contributions

For each employee who is deferring salary into the 401k, the business owner will match 100% of the employee’s contributions up to 3% of the employee’s salary, plus 50% of the employee’s contributions, between 3%–5% of salary. This results in a 4% matching contribution for an employee who contributes at least 5% of their pay into the plan. Additional matching formulas may be available, depending on the plan.

Nonelective contributions

The business owner will make a contribution equal to 3% of salary for every employee who is eligible to participate in the plan. Unlike matching contributions, these nonelective contributions are given to all eligible employees even if they are not making salary contributions to the plan.

Safe Harbor Provision Deadlines

New plans:

The Safe Harbor provisions must be in place for at least 3 months if you are adopting a new 401(k) or 403(b) plan.  So, if you are starting a new calendar year plan, the plan must begin no later than October 1 to include Safe Harbor provisions for that first plan year. Starting a new plan can take time to administer, so we recommend contacting your plan provider no later than September 21st.   Request a Free Consultation Today!

Existing Plans:

Safe Harbor provisions can only be added to an existing plan before the beginning of the plan year, and they must be in effect for the entire year.  Safe Harbor provisions cannot be changed or eliminated during the year except if the plan is terminated completely.  In the event of plan termination, the Safe Harbor contribution up through the date of termination would still apply.

401k Compliance Testing

A Safe Harbor plan is designed to pass the two nondiscrimination tests that the plan is not providing a more significant benefit to HCEs.

  •  The Actual Deferral Percentage (ADP) test: This limits the percentage of compensation that HCEs can defer into the 401k based on the average contribution rates of the non-highly paid employees.
  • The Actual Contribution Percentage (ACP) test: This ensures that the employer matching contributions and any after-tax employee contributions contributed for HCEs are not disproportionately higher as compared to non-highly paid employees. 

Top Heavy Testing

Top Heavy testing is similar to the ADP and ACP tests but is focused on plan balances. If you and your key employees cumulatively hold 60% or more of the total balance plan, then the plan is Top Heavy.

If the only contributions you make to your plan are Safe Harbor contributions and employee deferrals, your 401(k) plan is exempt from Top Heavy correction requirements. If your plan is Safe Harbor, but a Discretionary Profit Sharing or Matching were deposited’ the plan is NOT exempt from Top Heavy Testing.

How to set up a Safe Harbor 401k

To set up a Safe Harbor 401k plan, you must contact a 401k-plan provider like Ubiquity Retirement + Savings™ who can provide an IRS-approved plan document to establish the plan, along with the recordkeeping and investment services you need to administer the plan.

Safe Harbor 401k plans are subject to special timing rules that require a business owner to adopt Safe Harbor features before the start of the plan year. Within 90 days before the beginning of the first Safe Harbor plan year (generally October 1), business owners must notify employees that a Safe Harbor feature has been adopted. Then, each year that the Safe Harbor feature is in effect, employees must receive a notice 30–90 days before the beginning of the plan year. Companies like Ubiquity automatically do this on behalf of the small business owner, so they have one less thing to think about.

Safe Harbor 401k solutions

Although a Safe Harbor 401k plan can benefit business owners and their employees, it may not be the best fit for every plan.

Business owners will want to weigh the cost of the mandatory contributions against the potential benefits. Our plan design experts at Ubiquity can walk you through the plan design options and the setup process to make sure your plan is designed to fit your needs.

“I find Ubiquity quite easy to work with. Being a small business, it is so nice to be able to call and receive help over the phone. Tony is very personable and knowledgeable. ”

- Nicole Brady, Geyser Equipment

Employer Contribution Rules and Requirements

Under a Safe Harbor 401k plan, the business owner makes a minimum contribution to the plan each year—which must be 100% vested (in other words: non-forfeitable). There are 3 main contribution options for employers to choose from:

  1. Basic Matching: Your company matches 100% of each employee’s 401(k) contributions, up to 3% of an their annual compensation, plus a 50% match of the next 2% of their defferals.
  2. Enhanced Matching: Your company matches at least 100% of each employee’s 401(k) contributions, up to 4% of their compensation.
  3. Non-elective Contribution: Your company contributes at least 3% of each employee’s compensation to all eligible participants—regardless of the employees’ contributions.

Once the Safe Harbor minimum contribution is satisfied, you can then defer the maximum $19,000 for yourself and more easily reward your most valuable staffers (and yourself) with profit-sharing plan contributions up to the individual maximum of $56,000.

Like a traditional 401(k) plan, a safe harbor 401(k) still allows you and your employees to make contributions from salary to save for retirement with pre-tax income. As of 2019, employees can contribute up to $19,000 a year (or $25,000 if they are 50 or older) from their salary. Those who contribute to a Safe Harbor 401(k) benefit from a lower tax bill and potentially far greater savings growth into the future.

Additional Safe Harbor Rules:

  • 100% vesting, immediately. All Safe Harbor employer contributions are 100% vested to the employee– this means they are nonforfeitable. If you choose to make additional employer contributions (whether match or profit sharing), those contributions may be subject to a vesting schedule.
  • 12-month plan rule. Safe harbor plan rules should be adopted before the first day of the plan year and remain in effect for an entire 12-month plan year.
  • Eligibility. All employees that are eligible to contribute to your 401k plan are also eligible for the Safe Harbor provisions for the plan. This means that once an employee is able to contribute to their own plans, they are also eligible for employee matching.
  • No allocation restrictions.  Once an employee is eligible for the Safe Harbor contribution, they will receive the contribution due to them for the year.  The employer cannot impose additional restrictions such as a “last day of service” or an hours requirement for Safe Harbor contributions

Safe Harbor Notice Requirements

In addition to maintaining a Safe Harbor plan an entire plan year, employers must provide an annual notice to all eligible employees 30-90 days before the beginning of the plan year. This document outlines the employee’s rights and obligations under the Safe Harbor Plan provision.

Your Safe Harbor notice must contain the following:

  • The safe harbor matching or non-elective formula used in the plan
  • Level of matching contributions, if any, other contributions under the plan, and the conditions under which they will be made
  • The type and amount of compensation that may be deferred
  • The method of making deferrals under the plan
  • The periods available for making elections
  • The withdrawal and vesting provisions applicable to contributions under the plan
  • How to obtain additional information about the plan

Your Safe Harbor Plan Notice may be delivered electronically, by hand, or by regular mail. Employers are responsible for tracking the delivery list, method, and timing of delivery— which will be requested in case of an audit by IRS or DOL. With a Ubiquity Safe Harbor 401k we will administer the plan notice for you, eliminating administrative hassle.

Learn more

If you are a small business owner and need a 401k plan for yourself and your company, only Ubiquity offers flat-fee plans plus free expert advice. We will fully customize your 401k to meet the specific needs of your small business.

Check out our cost-effective plan solutions

Setting up a 401k can be complicated. Only Ubiquity gives small business owners access to 401k experts in addition to industry leading low flat-fees. Each sales expert has over a decade of experience assisting business owners in 401k plan design. Take advantage of this free benefit.

We've got experts available by phone or email.

© 2019 Ubiquity Retirement + Savings
Privacy Policy
44 Montgomery Street, Suite 3060
San Francisco, CA 94104
Support: 855.401.4357

Facebook Twitter LinkedIn YouTube

© 2019 Ubiquity Retirement + Savings
Privacy Policy
44 Montgomery Street, Suite 3060
San Francisco, CA 94104
Support: 855.401.4357

Credit Card Logos