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