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How You Can Benefit from a Safe Harbor 401k

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.

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
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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.

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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

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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.

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© 2018 Ubiquity Retirement + Savings
1160 Battery Street, Suite 350, San Francisco, CA 94111 / Support: 855.401.4357

© 2018 Ubiquity Retirement + Savings
1160 Battery Street, Suite 350, San Francisco, CA 94111 / Support: 855.401.4357