Ubiquity
Date: September 20, 2019

Safe Harbor 401k Plans

A popular retirement solution for small business owners

  • Maximize your retirement plan contributions
  • Incentivize your team to save for their future
  • Sail through required IRS compliance testing
  • Deduct your contributions as a business expense
Don't miss the boat on 2019 tax savings!

Establish your Safe Harbor Plan with Ubiquity by September 20th to meet the 2019 IRS deadline.
Call 855-787-8202 or schedule a time to meet with a retirement expert.

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Safe Harbor is a way of structuring a 401k plan that allows small business owners to maximize their contributions while sailing safely through annual compliance tests given by the IRS.

These IRS tests prove that the plan is fair for all eligible employees and doesn’t unfairly discriminate against lower-earning employees. As a trade-off for passing these nondiscrimination 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.

How does a Safe Harbor plan work?

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.

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.

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

  • The business owners and other high earners can maximize their retirement plan contributions without worrying about the contributions of lesser-paid employees
  • The 401k plan is deemed to pass both IRS nondiscrimination tests, along with meeting the top-heavy minimum contribution requirements (see more below)
  • The business can take a tax deduction for employer contributions

Want to learn more? Take a lesson in Safe Harbor 101:

Establish a new Safe Harbor plan with Ubiquity by September 20th to save on your 2019 small business taxes.

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An Introduction to IRS Compliance Testing

There are 3 annual tests given by the IRS to make sure your plan is run fairly and benefits everyone–not just the people at the top. (These groups of high earners are referred to as “highly compensated employees” or “HCE”s.)

A Safe Harbor plan is designed to pass the two required nondiscrimination tests that prove your plan is not providing a more significant benefit to HCEs than to the rest of your employees.

The Actual Deferral Percentage (ADP) test:

This limits the percentage of compensation that HCEs can defer into their 401k based on the average contribution rates of the non-highly paid employees. This is the test that is most likely to impact small business plans.

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

The Top Test 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.

Employer Contribution Options for Safe Harbor 401k Plans

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

A matching contribution means that the employer’s contribution matches a certain percentage of the employee’s contribution. In a Safe Harbor plan there are two main matching formulas used:

  1. Basic Matching: In a basic match, the company matches 100% of each employee’s 401k contributions, up to 3% of an their annual compensation, plus a 50% match of the next 2% of their contributions.
  2. Enhanced Matching: In an enhanced match, the company matches at least 100% of each employee’s 401k contributions, up to 4% of their compensation.

Additional matching formulas may be available, depending on the plan.

Nonelective contributions

Unlike matching contributions, nonelective contributions are given to all eligible employees even if they are not making salary contributions to the plan. If a business owner decides to set up a Safe Harbor plan with nonelective contributions, the company must contribute at least 3% of each employees compensation to all eligible participants–regardless of the employees’ contributions.

Safe Harbor 401k Plan Provision Deadlines

If you’re starting a new Safe Harbor plan:

The Safe Harbor provisions must be in place for at least 3 months if you are adopting a new 401k or 403b plan. So, if you are starting a new calendar year plan, the plan must begin no later than October 1, 2019 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.

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Adding a Safe Harbor feature to your existing 401k plan:

Safe Harbor provisions can only be added to an existing plan before the beginning of the plan year and require you to provide a 30-day notice to your employees. If your new plan year begins January 1st, you’ll need to request the addition a Safe Harbor provision to your 401k plan before November 30th.

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.

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

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.  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.  Companies like Ubiquity automatically do this on behalf of the small business owner, so they have one less thing to think about.

Learn more

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

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 small business 401k 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.

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

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

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