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:
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.
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.
“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.”
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:
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.
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.
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.
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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