Category: Safe Harbor

5 Tips for Establishing an Efficient and Affordable 401(k) Plan for Your Small Business

Siân Killingsworth / 9 May 2023 / 401(k) Plan Information, Safe Harbor, Small Business 401k

Setting up a small business retirement plan can seem like a daunting task, but with the right guidance, it can be done efficiently and affordably. These five steps can help you establish a 401(k) plan for your small business as quickly and easily as possible (because we know you don’t have time to waste).

Step 1: Choose a Plan Provider

The first step in establishing a small business retirement plan is to choose a plan provider. We suggest working with a low-fee, transparent 401(k) provider (like Ubiquity!) to help you find the plan that’s right for your small business and your employees’ needs – especially one that charges only flat fees. This type of fee remains steady over time so you can accurately predict plan costs. Many providers charge a percentage, or assets under management (AUM) fee, which fluctuates as your balance changes. Over time, the percentage fees can erode your savings significantly.

Learn more about flat fees versus percentage fees here.

Step 2: Determine an Appropriate Plan Type

The first step in setting up a 401(k) plan for your small business is making sure the plan meets your company’s unique needs. There are several plan types to consider when picking a 401(k) plan for your small business, including:

• Solo 401(k): A solo 401(k) plan is designed for small business owners who have no employees other than their spouse. With a solo 401(k), small business owners can make contributions as both an employer and an employee.
• Traditional 401(k): Business owners, including those who are self-employed, can start a 401(k) plan for themselves and their employees, if applicable. A 401(k) plan enables businesses to meet retirement planning and saving goals while taking advantage of business and personal tax benefits. With a Ubiquity 401(k) plan, retirement contributions can be either pre- or post-tax (Roth), with funds being deposited directly from an employee’s paycheck each pay period. Many companies also match a part of their employees’ contributions.
• Roth 401(k): A hybrid between a Roth IRA and a 401(k) plan, earnings on after-tax contributions grow tax-free. However, the contribution limits in a Roth 401(k) are significantly higher than a Roth IRA — $22,500 ($30,000 if age 50 or older) in 2023, compared to $6,500 for a Roth IRA (plus an additional $1,000 if age 50 or older).
• Safe Harbor 401(k): A Safe Harbor provision is added to 401(k) plan to make it easy to avoid some of the IRS tests that traditional 401(k) plans are subject to. Safe Harbor 401(k)s are exempt from nondiscrimination testing, significantly reducing your administrative burden. Just remember that with a Safe Harbor plan, employers are required to contribute to the plan by matching a portion of their employees’ contributions or by making a fixed contribution each year.
• New Comparability 401(k): If you want to reward or particularly motivate certain employees, a New Comparability provision can be added to a traditional 401(k) plan. It enables customized retirement plan contributions for different groups of employees. This allows you to reward select groups with higher contributions while still offering healthy employer contributions to others. Known as a qualified defined contribution plan, the profit-sharing formula works by projecting out an employee’s current contribution to a future retirement-age benefit.

Step 3: Set Up Your Plan

After you’ve chosen a provider, it’s time to set up your plan. Work with your chosen provider to get all the provisions set up and all information uploaded properly. Make sure you have the information you’ll need, including:

• Employee information such as dates of employment and birth, email addresses, SSNs, etc.
• Select plan features and provisions, such as eligibility, contributions limits, and vesting schedules.
• Decide who will be the company’s primary contact, This could be the company owner, the human resources representative, or another trustee.

Step 4: Educate Your Employees

Your employees are more likely to participate in your plan if they understand the benefits! We recommend holding informational meetings to explain the plan’s features and benefits, then providing additional resources to help your employees make informed investment decisions.

Step 5: Manage and Monitor Your Plan

A 401(k) plan for your small business isn’t a set-it-and-forget-it type of thing. You’ll need to submit your employee and employer contributions on time every time. Integrating your plan with your payroll provider is a great way to streamline this process.

It’s important to review your plan’s fees and investment options periodically and make changes annually or as your business, headcount, or finances change.

Understanding the Tax Advantages of 401(k) Plans for Small Business Owners

Siân Killingsworth / 28 Apr 2023 / 401(k) Plan Information, Safe Harbor, Small Business 401k

Looking for ways to attract top talent to your small business while also saving for your retirement? You’re in the right place. A popular option for accomplishing both goals is to offer your employees a 401(k) plan. Not only does it incentivize them, it also provides you with tax savings. We’re breaking down how.

Tax Advantages for Small Business Owners

Tax deductions

Small business owners who offer their employees a 401(k) plan may be eligible for a few different types of tax deductions.

First, when you open a new plan, you can qualify for up to $5,000 per year for the first three years^1. Why? Because the government is very enthusiastic about supporting Americans’ retirement!

Second, if that plan has automatic enrollment, you can qualify for another $500 per year for those same three years¹. If you all that all up, it’s a potential $16,500 in tax credits. You can use these credits to cover the cost of plan setup and administration.

Finally, any employer contributions you make to your employees (hint: you’re also considered an employee!) are tax-deductible² for your business, meaning you can reduce the amount of taxable income reported on your business tax return.

Tax deferral

Both you and your employees can benefit from the tax deferral offered by a traditional small business 401(k) plan. Employee contributions are made on a pre-tax basis, meaning they are deducted from their taxable income for the year. This can lower tax liability and increase take-home pay. Taxes on contributions are not due until the funds are withdrawn from the plan.

Tax-free growth

401(k) plan funds grow tax-free until they are withdrawn in retirement. This means that any investment gains or dividends earned on the funds are not subject to income tax, which can help the funds in the account to grow more quickly over time.

Types of small business 401(k) plans

Let’s briefly review the various types of 401(k) plans that are available to small businesses. These include:

Traditional 401(k)

This is the most common type of 401(k) plan. It allows employees to make pre-tax contributions to the plan, and employers can choose to make matching contributions. The funds in the account grow tax-free until they are withdrawn in retirement.

Safe Harbor 401(k)

Looking for a plan that makes it easier for you to pass the annual nondiscrimination tests required by the IRS? A Safe Harbor provision added to your 401(k) could be right for you. Under this plan, employers are required to make contributions to the plan on behalf of their employees, either in the form of a matching contribution or a non-elective contribution.

New Comparability 401(k)

When you add a new comparability provision to your 401(k), this give you as the business owner and your highly compensated employees the flexibility to receive higher percentages of employer profit-sharing contributions than other eligible staff. It’s a great way to reward high-performing employees.

Sole-Provider 401(k) plan

This is a plan designed for self-employed individuals and small business owners with no employees (other than a spouse working for them). It allows for higher contribution limits than traditional 401(k) plans, and can be a powerful retirement savings tool for those who qualify.

1 Eligible employers may be able to claim a tax credit of up to $5,000, for three years, for ordinary and necessary costs of starting a 401(k) plan. IRS’ qualifying factors are: 100% for those with 50 or fewer employees, 50% for those with 100 – 50 employees who received at least $5,000 in compensation from you in the preceding year, you had at least one participant who was a non-highly compensated employee (NHCE) and in the three tax years before the first year you’re eligible for the credit, your employees were substantially the same employees who received contributions or accrued benefits in another plan sponsored by you, a member of a controlled group that includes you, or a predecessor of either. Those plans with automatic enrollment can claim a tax credit of $500 per year for a 3 year taxable period.

Reviewing and Updating Your Small Business 401(k) Plan

Siân Killingsworth / 14 Apr 2023 / 401(k) Plan Information, Personal Finance, Safe Harbor, Small Business 401k

As a small business owner, you may not be intimately familiar with the details of your 401(k) plan. That’s pretty normal, but it’s important to know what your options are, how they can help you save on taxes, and even potentially help you grow your business.

It’s smart to review your plan document annually, but more frequently if your business changes throughout the year. For example, if your business expands significantly, or if you hire a new employee who will be working part-time instead of full-time, you should revisit your eligibility and contribution requirements. You may also want to start or update employer contributions to employees’ accounts.

Why is Regularly Reviewing and Updating Your 401(k) Plan Important?

• Changes in business size can necessitate changes to your plan. When you start out as a one-person shop, it makes sense for your retirement savings account to be a solo 401(k) plan such as a Ubiquity Single(k)®. But as your company grows and hires more employees, you may find that you need to upgrade to a plan that covers all your employees, such as a Ubiquity Custom(k)®. To ensure that your plan passes most mandatory IRS testing, consider adding a Safe Harbor provision to your existing 401(k) plan. This enables your company to actually bypass certain compliance tests because you’re required to make minimum contributions to all employees at a pre-approved rate to ensure all employees are being treated fairly.
• Regulations change. Keeping up with these changes is crucial if you want to avoid penalties or fines from the government. And don’t forget that sometimes these changes are to your benefit! For example, annual contribution limits rise, meaning that you and your employees can all put more money in your 401(k)s each year. For 2023, anyone under age 50 can save up to $22,500, and those age 50 and older can save up to $30,000.
• Improve your own retirement readiness. By regularly reviewing and updating your 401(k) plan, you’ll be able to ensure that you and all of your employees are saving for retirement on schedule. Are you taking advantage of all the tax savings opportunities your plan provides? Are you maxing out your contributions to your own retirement?
• Increase employee satisfaction. Employees who feel valued by their employers are more likely to stay with them longer than those who don’t feel valued, which means regular reviews and updated benefits could help keep turnover low.
• Improve employee participation. The more employees participate in their own 401(k)s, the better set up they will be in the future.

How to Review Your 401(k) Plan

There are several steps you can take to help your employees get the most out of their retirement plans.

First and foremost, review the plan documents for accuracy and completeness. Make sure that all information in the document and with your provider are is current and accurate, including:

• Name and address of your company.
• Designated plan sponsor, trustee(s), and financial advisor, if applicable.
• Designated investment options available within the plan.

The plan should:

• Cover the appropriate employees.
• Provide employees required disclosures.
• Deposit employee deferrals on time.
• Make employer contributions on time.
• Follow the terms of the plan document.
• Limit employee deferrals and employer contributions to the proper maximum limits.

Reviewing your small business 401(k) plan doesn’t just mean looking at it and then forgetting about it again. It means making sure that any necessary updates are made as soon as possible so that no one gets left out or misses out on benefits they could otherwise receive from participating in the program – including you.

Ubiquity is not a registered investment advisor and no portion of the material herein should be construed as legal or tax advice. Please consult with your financial planner, attorney and/or tax advisor for advice.

Stay Ahead of 401(k) Plan Compliance Changes

Karen Benewith, QKA, QPFC, AIF® / 7 Apr 2023 / 401(k) Plan Information, Safe Harbor

Keeping up with your small business 401(k) can seem a daunting task–and that’s before you factor in any regulatory changes. But paying close attention to your small business’s 401(k) plan compliance is imperative because you have a legal obligation to ensure your 401(k) plans comply with all relevant regulations.

Failure to comply can result in hefty fines. Noncompliance can also harm the reputation of your business and erode trust among employees. But don’t worry – we make it easy to stay on top of the ever-changing regulatory landscape.

Common 401(k) Plan Compliance Issues

There are several common compliance issues that small business owners should be aware of, including:

• Failure to deposit employee contributions on time
• Exceeding contribution limits
• Discrimination in favor of highly compensated employees
• Inaccurate plan documentation
• New legislation mandating certain provisions, such as automatic enrollment
• Updated contribution limits

Stay Compliant with 401(k) Plan Regulations

To start, sit down with a compliance calendar and map out all the deadlines you need to meet this year to keep your 401(k) plan in compliance.

The 800 pound gorilla to pay attention to is end-of-year IRS testing. Every plan sponsor must pass these tests to ensure your plan treats all employees fairly.

Called nondiscrimination tests, they are designed to determine if highly compensated employees are able to save money for retirement at a rate that is disproportionately favorable compared to the rate at which rank-and-file employees can save.

Small business owners can stay compliant with 401(k) nondiscrimination testing rules by:

• Understanding what a highly compensated employee is.
• Encouraging rank-and-file employee participation.
• Designing a plan with employer contributions that automatically passes IRS testing by choosing a Safe Harbor plan.
• Keeping up with annual IRS changes.

If you’re running a small business, working with an experienced retirement plan administrator for your 401(k) planning needs is another great way to set your plan up for success.

Consider Outsourcing 401(k) Plan Administration

One way for small businesses to stay compliant with 401(k) plan regulations is to outsource plan administration to a reputable provider (hi, we’re Ubiquity). Some of the benefits of outsourcing include:

• Expertise: We have a team of small business 401(k) experts who know the ins and outs of 401(k) plan regulations and can help ensure that plans remain in compliance.
• Time savings: Plan administration can be time-consuming, particularly for small businesses with limited resources.
• Reduced risk: By outsourcing plan administration, you can reduce your risk of noncompliance and the associated fines and other unpleasant consequences.

These issues can be challenging for small business owners to navigate, particularly if you do not have an in-house HR or compliance team. Get in touch with us today–we’ll help make sure your small business stays on the right path.

Ubiquity is not a registered investment advisor and no portion of the material herein should be construed as legal or tax advice. Please consult with your financial planner, attorney and/or tax advisor for advice.

Benefits of a Safe Harbor Provisioned 401(k) Plan

Robby Forsythe / 5 Apr 2023 / 401(k) Plan Information, Safe Harbor, Small Business 401k

If you are a small business owner, you may have considered offering your employees a 401(k) plan to help them save for their future (and reduce their taxable income in the process).

However, setting up and maintaining a 401(k) plan can be complex, and failure to comply with the regulations could result in corrections and even have large penalties. One way to make the process easier (and safer) is by offering a Safe Harbor 401(k) plan.

What is Safe Harbor?

Although most people refer to this as a Safe Harbor plan, Safe Harbor is actually just an optional provision to a 401(k) plan. This provision is designed to automatically pass certain nondiscrimination testing requirements set by the IRS. These requirements ensure that the plan does not favor highly compensated employees over non-highly compensated employees when it comes to contributions and benefits.

With a Safe Harbor provision in your 401(k) plan, you agree to make certain contributions on your employees’ behalf; in return, the plan is exempt from certain non-discrimination testing requirements.

The Benefits of a Safe Harbor 401(k) Plan

Reduced Administrative Burden

One of the main benefits of offering a Safe Harbor 401(k) plan at your small business is that it can greatly reduce the administrative burden on you as the employer. Non-Safe Harbor plans require annual deferral and match testing, which can be complex and time-consuming.

With a Safe Harbor plan, those testing requirements are waived, allowing the employer to spend less time and resources on plan administration.

Increased Employee Participation

Another advantage of a Safe Harbor 401(k) plan is that it can increase employee participation. By offering a safe, simple, and automatic plan, employees are more likely to enroll and contribute to the plan. This can help employees save for their future while also helping you attract and retain top talent.

Avoiding Corrections

Non-compliance with non-discrimination testing can result in corrections, which could mean you have to return contributions to highly compensated employees and pay taxes and penalties. Safe harbor plans are exempt.

Higher Contribution Limits Annually

All 401(k) plans, including those with a Safe Harbor provision, have higher contribution limits each year per the IRS. In 2023, employees can contribute up to $22,500 to their 401(k) plan, with an additional $7,500 catch-up contribution for those over age 50. This can help employees save more for their retirement. While the increased limit isn’t unique to Safe Harbor plans, it’s certainly a nice expansion of the benefit. A Safe Harbor provision does allow highly compensated employees to contribute up to the limits without worry of any corrective refunds.

How to Set Up a Safe Harbor 401(k) Plan

If you are interested in setting up a Safe Harbor 401(k) plan for your small business, there are a few things you need to know.

Contribution Types

To be eligible for a Safe Harbor 401(k) plan, you as the employer must make certain contributions to your employees’ retirement accounts. There are two types of Safe Harbor contributions: a non-elective contribution or a matching contribution.

• The non-elective contribution requires employers to contribute a percentage of each eligible employee’s compensation, regardless of whether the employee contributes to the plan.
• The matching contribution requires the employer to match 100% of each eligible employee’s contributions up to a certain percentage (usually 4%) of their compensation.

Funding Requirements

To maintain Safe Harbor status, employers must make the required contributions on time each year. Both contribution types must be funded by the end of the next plan year and generally, to take as a deduction, they must fund prior to their tax return including extensions. However, some documents require that the match be funded each pay period, which means they are required to fund no less than a quarterly basis to avoid late penalties.

Notice Requirements

To offer a small business 401(k) plan with a Safe Harbor provision, you must also provide certain information to employees. This includes notification explaining the plan’s provisions and informing employees of their right to make contributions to the plan. This notice must be provided at least 30 days before the beginning of each plan year.

3 Reasons to Start a Safe Harbor 401(k) 

Siân Killingsworth / 2 Nov 2022 / 401(k) Plan Information, Safe Harbor

While avoiding certain IRS non-discrimination testing is usually the main reason small businesses switch over to a Safe Harbor 401(k), these plans offer additional benefits to employers. Three reasons Safe Harbors are among the best 401(k) plans for small businesses include:

• Compliance
• Flexibility
• Attracting and retaining top talent

As a business owner, implementing a 401(k) plan is perhaps the most popular and effective way to ensure your employees are in a position to retire at a reasonable age.

However, the Internal Revenue Service requires employers who offer 401(k) plans to jump through several hoops, which can make it difficult for business owners (particularly owners of small businesses) to provide the benefit. One of the biggest obstacles in the way of offering a 401(k) plan is the IRS’s annual non-discrimination testing. During this test, the IRS checks to ensure that employers are not unfairly favoring certain employees. If a business fails this test, it can face severe punitive consequences.

As a result, many small businesses are better served by offering a Safe Harbor 401(k) plan, which makes them exempt from certain non-discrimination testing. These plans require mandatory employer contributions, as well as immediate vesting for employees.

#1. Helps Ensure Compliance

When a business offers a 401(k) plan, the IRS ensures the business does not unfairly favor highly-compensated employees (HCEs) through non-discrimination testing, performed annually. To do this, the IRS compares plan participation and contributions of every employee in the business, from entry-level employees to the owner.

According to the IRS, traditional 401(k) plans must follow these three rules to avoid failing the non-discrimination testing:

• HCEs cannot contribute greater than 2% of the average contribution of all other eligible employees. For example, if the average employee is contributing 4% of their income to the 401(k) plan, HCEs may not exceed 6%.
• HCEs cannot receive more than 2% in contributions compared to the average employee. For example, if the average employee is receiving 2% of their income in contributions to their 401(k) plan, HCEs may not exceed 4%.
• The combined assets of key employees’ (owners and officers) retirement accounts cannot exceed 60% of the employer’s entire 401(k) plan.

If a business’ plan fails these tests, it may be costly to correct. While larger businesses may have the ability to balance these requirements, it can be difficult for smaller businesses with limited manpower to stay in compliance.

A Safe Harbor 401(k) plan is designed to meet these requirements without any extra effort. And since Safe Harbor 401(k)s offer the same contribution maximums as traditional plans, HCEs can maximize their contributions without the plan failing the non-discrimination testing.

#2. Provides Flexibility

For small businesses, flexibility is one of the most important factors to consider when choosing a retirement plan. Safe Harbor 401(k) plans provide this flexibility with three different options:

• Basic Matching:

The Safe Harbor is a tiered match where the employer matches 100% of the contributions up to 3% of the employee’s compensation, and 50% of the employee’s deferrals up to the next 2% of compensation.

• Enhanced Matching:

If the business chooses an enhanced matching plan, it will match 100% of an employee’s contributions, up to a certain percentage of compensation (minimum of 4%).

• Nonelective Contributions:

Under a nonelective contribution plan, the employer contributes 3% of compensation to the employee’s 401(k) account, whether they choose to participate in the plan or not.

These percentages are minimums – if the business wishes to contribute more to its employee’s plans, they are free to do so.

#3. Helps Attract and Retain Talent

Another reason businesses choose to offer Safe Harbor 401(k) plans is to improve their ability to attract and retain top talent. In a competitive market, benefit plans allow employers to differentiate themselves from other employers. With a Safe Harbor 401(k) plan, employees are guaranteed an employer-contributed retirement account, which can greatly assist in the hiring process.

Moreover, top talent is more likely to be retained with a Safe Harbor 401(k) because the plans allow highly compensated employees to maximize their contributions without the fear of refunds or corrections that usually are associated with 401(k)s. Combined, these factors give small businesses a leg-up on their competition.

Contact Ubiquity for a free Safe Harbor consultation and learn how a Safe Harbor 401(k) can help your business.

Safe Harbor 401(k) Plans: Q & A 

Siân Killingsworth / 28 Sep 2022 / 401(k) Plan Information, Safe Harbor

Small businesses have a myriad of retirement plan options. One is a Safe Harbor 401(k) plan, which reduces plan administration duties and frees you from annual IRS testing. While these time-saving incentives are undeniably attractive, it’s important for small business owners to consider how the Safe Harbor option stacks up against other small business retirement plans.

The following 401(k) questions and answers can help you determine whether a Safe Harbor plan provision is right for your small business.

What is a Safe Harbor 401(k)?

All qualified retirement plans are subject to certain nondiscrimination tests to verify that they do not provide unfair advantages to owners and highly compensated executives over other employees. Safe Harbor provisions enable immediate vesting of retirement benefits and allow the plan to bypass nondiscrimination tests.

These plans enable a type of contribution made by the employer into an employee’s 401(k) account. This amount is predetermined and normally represented as a percentage of the participant’s salary. 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.

What specific provisions are required for a plan to claim Safe Harbor protection?

Small business 401(k)s with Safe Harbor provisions generally include one of three employer contribution alternatives:

• The company matches 100% of an employee’s contributions up to 3% of the employee’s salary, with an option of an additional 2% match for half the salary.
• The company matches 100% of an employee’s contributions up to 4% of the employee’s salary, with no option for additional employer contributions.
• The company contributes an amount equal to 3% of the employee’s salary with no contributions by the employee.

How does a small business implement a Safe Harbor 401(k) plan?

If a small business wants to include Safe Harbor provisions in a retirement plan, it must provide prior written notice of those provisions to all employees. That notice must specify the Safe Harbor provisions that the small business has elected to adopt, as well as detailed information on the provisions’ effects on taxation and employee rights. The small business must also factor contributions and plan administration costs into its accounting systems.

How do small businesses benefit from Safe Harbor 401(k) plans?

First, when an employer has a Safe Harbor feature in their 401(k) plan, the most critical advantage is that they are automatically exempted from the annual compliance testing that’s required for all non-Safe Harbor 401(k) plans. This testing is essentially a government-mandated review of the plan whose purpose is to ensure that the 401(k) plan itself isn’t overly advantageous to highly compensated employees (HCEs) at the company.

A highly compensated employee is generally someone who owns or has owned more than 5% of the interest in the business any time during the year or preceding year. Another definition of an HCE is one who made more than $135,000 in the previous year in their income.

A key point to know for testing season is if the 401(k) plan doesn’t have a safe harbor, and it goes through that annual testing, and those test results find that a given HCE’s contributions for the year exceeded 2% of the average contribution rate of all non-HCEs, then that HCE who over-contributed will have to take a mandatory distribution from their account. By extension, this money will no longer be accruing in their retirement accounts.

How do Qualified Automatic Contribution Arrangements (QACAs) affect a Safe Harbor 401(k) plan?

QACAs are a subset of Safe Harbor 401(k)s that include automatic enrollment provisions. With a QACA option, the small business is obligated to make matching contributions to employee retirement plan accounts. The primary QACA benefit is that it allows a small business to implement a two-year vesting schedule for employer matching contributions.

More Safe Harbor 401(k) Questions? Ask Ubiquity

If you have questions about 401(k) retirement plans for your small business, including how to take advantage of Safe Harbor tax credits, contact Ubiquity — one of America’s top providers of low-cost, flat-fee small business 401(k)s.

How to Stay Compliant for 401(k) Nondiscrimination Testing

Siân Killingsworth / 29 Aug 2022 / Safe Harbor

The end of the year means a lot of things for small business owners: closing out budgets, getting your year-end orders completed, and benefits enrollment. Whether you’re opening a new 401(k) or sticking with your existing plan, you might be facing IRS testing to make sure your plan treats all employees fairly.

These tests are called nondiscrimination tests, and they are designed to find out if highly compensated employees are able to save money for retirement at a rate that is disproportionately favorable compared to the rate at which rank-and-file employees can save. Small business owners can stay compliant with 401(k) nondiscrimination testing rules by:

• Understanding what a highly compensated employee is.
• Encouraging rank-and-file employee participation.
• Designing a plan with employer contributions that automatically passes IRS testing.
• Keeping up with annual IRS changes.

If you’re running a small business, working with an experienced retirement plan administrator for your 401(k) planning needs is another great way to set your plan up for success.

Understand what highly compensated means:

Understanding how employees are defined is an important step toward compliance.

• A highly compensated employee (HCE) owns more than 5% of the business at any time during the year or preceding year or earned more than $135,000 in 2022 or was designated as the “top paid group” (which often comprises the top 20% in terms of salary)
• A non-highly compensated employee (NHCE) is anyone who is eligible to participate in the plan who doesn’t meet the criteria
• Key employees can include HCEs or NHCEs if they own more than 5% of the company, if they are the parent/child/spouse of someone who owns more than 5% of the company, or if they own more than 1% of the company and more than $150,000

If the plan fails nondiscrimination testing, refunds may be due back to the HCEs, or you may need to make contributions to non-HCEs to bring their contribution ratio up. In the worst-case scenario, the whole plan could fail and become disqualified.

Encourage widespread 401(k) plan participation

Financial wellness advising and retirement education training can help boost employee participation rates, though these services can be cost-prohibitive for small business employers.

Establishing a plan with automatic enrollment is one way around this issue, as it provides employers with a three-year tax credit that helps offset the costs of setting up a new plan.

Employees can always opt out, but this strategy has shown to double or even triple the rate of participation, particularly among younger employees and those earning less than $30,000.

Most commonly, auto-enrollment plans deduct at least 3% of an employee’s pay, increasing by 1% a year to a maximum of 10%.

Design a plan that passes

Plan providers often recommend Safe Harbor 401(k)s for small businesses. Though these small business 401(k) retirement plans require employer matching or non-elective contributions, they automatically pass nondiscrimination tests and negate the need for annual plan auditing.

A Safe Harbor matching formula may be:

• Traditional: Employer matches 100% of salary deferrals on the first 3% of compensation plus 50% of salary deferrals on the next 2% of compensation
• Enhanced: Employer matches 100% of salary deferrals up to 3-6% of compensation
• Non-elective: Employer contributes at least 3% of employee pay up to the limit, regardless of what employees themselves contribute

Keep up with annual IRS changes

Every year, the IRS adjusts certain figures in response to inflation and rising salaries. These figures are typically announced at the end of October, so keep your eyes on this space for those updates.

Contact 401(k) plan administrator Ubiquity for more details on setting up a small business retirement savings plan.

Small Business Owner’s Guide to SECURE ACT Tax Credits

Siân Killingsworth / 9 Aug 2022 / 401(k) Plan Information, Retirement Trends, Safe Harbor

If you’ve held off on providing a 401(k) plan to your employees in the past due to startup expenses, then it’s time to look into the SECURE Act tax credit. As of January 1, 2020, small business 401(k)s are eligible for a tax credit that offsets the cost of plan setup and administration for the first three years.

As a small business 401(k) provider, the experts at Ubiquity will provide all the information you need to offer a new retirement plan at a low, fixed cost.

Step 1: Determine your SECURE Act eligibility.

For SECURE Act 2022 eligibility, you must:

• Have less than 100 employees who receive $5,000+ per year in compensation.
• Have at least one plan participant who is a non-highly compensated employee.
• Not have had a 401(k) or other qualifying retirement plan within the past 3 years.

Step 2: Set up your small business 401(k) plan.

Next, you’ll need to work with a small business 401(k) plan provider to set up your plan. You’ll need to create a plan document that complies with IRS Code and outlines all the details of your retirement plan. You’ll also need a trust to hold the plan assets and a broker to help you select funds and execute the investments.

Over the years, your 401(k) administrator will help you maintain 401(k) records, enroll new employees, track employee deductions, provide information to plan participants, and keep your plan in compliance with the law.

Ideally, you will choose a low-cost 401(k) provider that focuses on small business clientele and charges a flat fee for service. Administrative costs can vary considerably, with some providers charging per-person fees and assets under management fees — expenses that grow along with the size of your plan. Alternatively, Ubiquity provides flat-fee plans whose cost will never rise, no matter how much your savings grow.

Step 3: Claim your SECURE Act credit.

When you file your taxes, you’ll need to file IRS Form 8881 to claim your startup tax credit. Taking this simple step can qualify you for a tax credit worth $500 to $5,000, put toward up to 50% of your 401(k) setup and administration expenses. If you choose the automatic enrollment feature, you qualify for an additional $500 per year, dollar for dollar.

These credits can be applied for the first three years of your new plan. In total, you can get up to $16,500 in free money for your business just for starting a retirement savings plan, which can help you save more for your own retirement and make your company more competitive in the job market.

Keep in mind that even after the first three years, you’ll be able to write off any non-elective or matching contributions to reduce your company’s taxable income. What’s more, any money put into your own 401(k) will reduce your personal taxable income. The saved money will gain compounding interest over the years, helping you to feel more financially secure in your retirement.

Questions about 401(k) retirement plans for your small business? Contact Ubiquity today.