How Safe Harbor 401(k) Plans Benefit Business Owners & Financial Advisors

Safe Harbor season is in full swing at Ubiquity. 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, a Safe Harbor 401(k) is a viable asset that can boost your business and give you peace of mind.  

What’s a Safe Harbor 401(k) Plan?

A Safe Harbor is a type of 401(k) plan that allows business owners to bypass most IRS compliance tests in exchange for providing a mandatory employee contribution. Typically, an employer will contribute between 3-6% of each employee’s salary into the retirement plan to encourage all employees to save and build the future they want. 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

  1. A dollar-for-dollar match on employee contributions up to 4% of their annual income, or
  2. A dollar-for-dollar match up to 3%, plus 50 cents to the dollar on the next 2% of the employee’s salary

Another option is a non-elective contribution, which is when a plan sponsor decides that they want to make a Safe Harbor contribution to the employee’s account, regardless of whether 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.

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 don’t have to worry about the complicated paperwork and processes that come with testing, and possibly failing!

The second key advantage 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

The advisors that work with Ubiquity love Safe Harbor plans for a plethora of reasons, including:

  1. 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.
  2. 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.

A 401(k) Plan is Necessary – Even Without a Safe Harbor Provision

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:

  1. Follow state and national retirement plan requirements
  2. Save a lot in personal and business taxes while lowering their taxable income
  3. Save time and avoid stress by integrating payroll and automating plan administration
  4. Offer a competitive benefit to employees – one that is the second-most desirable benefit behind healthcare.
  5. Receive Secure Act Tax credits for establishing a new retirement plan for employees

Important Deadlines

There are quite a few Safe Harbor Deadlines coming up from now until the end of the year, but we summed up some of the most important ones below.

  • The deadline to start a new Safe Harbor plan with Ubiquity is September 16.  
  • 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 an owner already has a 401(k) plan with Ubiquity and wants to add a Safe Harbor provision, it must be set up by November 18.

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