Guest post by Jason Gross, National Sales & Development Director
One of my financial advisor clients stopped to deliver a heartfelt thank you at the end of our initial consultation. Another partner sent me a good old-fashioned, handwritten note. That tends to happen to me at this time of year.
As some of you know, I joined Ubiquity when it was a 10-person startup called The Online 401(k). And since I started working here, late summer/early autumn has always been the most fun because it’s when my clients are reminded how partnering with me has made their lives easier and less stressful.
So, what’s going on, you ask? Well, it’s Safe Harbor time. That means for small-to-medium size businesses, this is the time of year when the deadline to sign up for a Safe Harbor 401(k) plan rapidly approaches. What’s the big deal? If you are a small-to-medium size business and you want to:
- Save money on your taxes
- Avoid the IRS reducing your 401k savings
- Reward your employees (even if you’re the only participant)
…you’ve got less than three weeks left to act before you are out of luck and have to postpone till next year.
What’s a Safe Harbor 401(k) Plan?
Safe Harbor is the table stakes that make small business 401k a viable solution for owners to save for retirement. It is a declared employer contribution eliminating most of the means testing that can come with retirement plans. Typically, an employer will contribute between 3-6% of each employee’s salary into the retirement plan to encourage all employees to save. The most common form of a Safe Harbor contribution is a match, meaning the employer is only responsible for contributing when the employee does so too.
Two Common Safe Harbor Formulas
- A dollar-for-dollar match on employee contributions up to 4% of their annual income, or
- A dollar-for-dollar match up to 3%, plus 50 cents to the dollar on the next 2% of the employee’s salary
Most of my clients chose option 1 for its simplicity of explanation and administration. Do you have a favorite? Let me know in the comments below.
Another choice is what’s called a non-elective contribution. And that’s when a plan sponsor decides that they want to make a Safe Harbor contribution to the employee’s account, regardless of whether or not the employee makes their own contribution. This lowers the overall cost to 3% of pay but must go to all employees regardless of their participation.
Why I Recommend Checking Out a Safe Harbor Plan
Why would you want to include a provision for a Safe Harbor match to begin with? Doesn’t it sound like the business owner is just giving money away?
It does, but here’s the deal: everyone benefits from a Safe Harbor: the employee, the small business owner, and the financial advisor. I’ll start off with the employee. I think the advantages here are obvious.
It’s essentially free money that the employer is depositing into their retirement account.
It can incentivize employees to increase their savings rate. Let’s say I’m an employee and have a 401(k) plan. I’m initially inclined to contribute only 2% of my salary to my 401(k). But if I know that my employer will match up to 4%, it’s much more likely that I’ll feel compelled to elevate my own contribution amount, so I’m not leaving any money on the table.
These employer contributions are immediately vested for the employee. This means that as an employee, I’m always entitled to my employer’s contributions immediately – I don’t have to be employed for a set amount of time before it belongs to me.
Safe Harbor Works Hard for Employers
The advantages for the employer can be substantial.
First and foremost, a Safe Harbor provision ensures exemption from most annual compliance testing that’s required for all other 401k plans. Meaning you get around risking your savings to a means test that favors rank and file employees!
This testing is essentially a government-mandated review of the plan to ensure that the 401(k) plan itself isn’t overly advantageous to highly compensated employees at the company.
The second key advantage for the employer is that any contributions made on behalf of employees can be deducted from corporate taxes. Depending on how many employees you have, this can add up to quite a large deduction.
And third, if the employer is also a participant in the plan, they can reduce their own personal tax liability with their own pretax contributions, they get to match those funds from their Safe Harbor match, and they get to use this match for their own account to write off on their corporate taxes.
Advisors Love Safe Harbor Too
One of the folks I mentioned at the beginning is an advisor, he is one of those who reached out to thank me. Here’s why my advisors love it:
- More peace of mind because it saves precious time and resources. Whether it’s coordinating back and forth with a small business owner or a highly compensated employee as to what’s going to be happening with their money, a Safe Harbor provision helps cut through all that.
- More employees will have an added incentive to save…which all Advisors appreciate! As those savings accumulate, the interest will also accumulate, ultimately boosting total plan assets for the advisor and their bottom line.
No Matter What, a 401(k) Plan Supports Small Business Owners
But even without a Safe Harbor provision, a Ubiquity Retirement + Savings 401(k) enables small business owners to do so many things at the same time. The top 5 reasons I hear all the time from them are:
- Follow state and national retirement plan requirements
- Save a lot in personal and business taxes while lowering their taxable income
- Save time and avoid stress by integrating payroll and automating plan administration
- Offer a competitive benefit to employees – one that is the second-most desirable benefit behind healthcare.
- Receive Secure Act Tax credits for establishing a new retirement plan for employees
I’d be remiss if I didn’t make sure you knew there are a few different deadlines to bear in mind:
- For new 401(k) plans with a Safe Harbor match provision, to avoid discrimination testing next year, owners need to set up that Safe Harbor match plan and distribute the Safe Harbor notice (which Ubiquity provides) to employees no later than October 1.
- Since we at Ubiquity primarily deal with new 401(k) plans, we tend to get a major influx of new clients close to the Safe Harbor deadline. For that reason, we strongly recommend that your client sets up a plan with us no later than September 15.
- For existing 401(k) plans that are moving to Ubiquity that might want to add or change their Safe Harbor provision. Get talking with our team no later than late August or early September. This is not just to account for the Safe Harbor notices, but also because it can take time to move assets from one provider to another.
- Finally, if the 401(k) plan is already with Ubiquity and the small business owner wants to add a Safe Harbor provision, it must be set up by November 1 to take effect for January 1. A Safe Harbor non-elective provision can still be added for 2022 if you add the contribution by 12/1.
Where Can I Find a Safe Harbor 401(k)?
Not that I’m biased or anything, but I work at Ubiquity, and Safe Harbor 401(k) plans are in our blood. We’ve served over 100,000 participants and have helped them save over $3 billion. Reach out to me anytime and I’d be happy to review your unique situation to help you decide if a Safe Harbor 401(k) will make you feel as happy and relaxed as those clients I mentioned. Connect with me on LinkedIn and let me know what your thoughts on Safe Harbor are – and let me know what else you’d like me to write about!