How to Set Up a 401k: A Step-by-Step Guide

A popular retirement solution for small business owners

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Sail through required IRS compliance testing
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Establish your Safe Harbor Plan with Ubiquity.
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Looking to reward your employees with higher retirement contributions and allow higher contributions for owners, while legally bypassing potentially expensive annual nondiscrimination testing?

The Safe Harbor 401(k) Plan is easier and less expensive to administer than a traditional 401(k), but you will need to talk with your retirement plan provider to set it up.

The experts at Ubiquity can lead you through the pros and cons of a Safe Harbor plan and help you decide what 401(k) plan is right for your small business or start-up. If you have an existing Ubiquity plan and would like to add a Safe Harbor provision, contact us at support@myubiquity.com or 855.401.4357, option 1. We will be happy to help you update your plan’s provisions with a plan amendment or answer any questions you may have.

Take a lesson in Safe Harbor 101:

Important Deadlines for Setting Up A Safe Harbor 401(k) Plan

Most retirement plans are designed for a January 1 start. Based on this date, deadlines include:

August 23: It can take a week or more to set up a new plan, so contact your provider prior to September 1 if you want to be really at the top of your game.
October 1: If you’re starting a new 401(k) plan and would like to add a Safe Harbor provision, you will need to do so at least 90 days before the end of the year. You may begin sending written notices to all employees, informing them of their rights and obligations under the new plan if you wish.
December 1: If you have an existing plan and would like to add a Safe Harbor provision, you will need to do so at least 30 days before the start of the following calendar year. You must send 30-day notice to all employees at this time if you haven’t done so already.

If you already offer a Safe Harbor 401(k) plan, you can make mid-year changessuch as increasing non-elective contributions from 3% to 4%, or changing the plan entry date for eligible employees from quarterly to monthly. However, the IRS requires that you provide notice to employees 30 to 90 days before the changes are scheduled to go into effect.

Safe Harbor 401(k) Rules

Before you set up your new plan, you’ll need to consider all the subtle nuances of a Safe Harbor 401(k), including the rules, matching requirements, and costs. In exchange for bypassing traditional nondiscrimination testing, you’ll need to follow these Safe Harbor 401(k) rules to ensure your plan is beneficial to all company employees:

You must make contributions. You can choose from basic or enhanced matching or non-elective contributions – but, most notably, you must make annual contributions on behalf of your employees.
You must vest immediately. Safe harbor contributions must always be 100% vested. Unlike other types of matching, safe harbor matches must be available to new employees and are not returned to the employer even if an employee is terminated or leaves during the year.
You must stay within acceptable contribution limits. In 2022, the basic employee deferral limits are the same as any employer-sponsored 401(k): $22,500 per year for employees younger than age 50, and $30,000 (including $7,500 in catch-up contributions) for employees age 50 or older.

Designing Your Plan Based on Safe Harbor 401(k) Matching

Employers can choose one of three types of Safe Harbor 401(k) matching:

Basic Matching: Employees must defer funds to receive contributions. The company matches 100% of all employee contributions, dollar for dollar, on the first 3%, plus 50% matching on the next 2%.
Enhanced Matching: Again, employees must defer funds to receive contributions. The company matches 100%, dollar for dollar, on at least 4% of employee contributions, up to a maximum of 6%.
Non-Elective Contributions: Even if an employee chooses not to make contributions, the company contributes 3% of the employee’s W2 income.

Your choice of 401(k) matching is a personal decision, and we are happy to discuss it with you. Companies sometimes switch from a safe harbor non-elective contribution to a match, thinking low deferral rates will be less expensive, only to find that employees increase their deferrals to receive the larger company contribution.

So, if your goal is to encourage saving for retirement, matching is a good bet. If your goal is cost-savings, a different 401(k) plan might be better suited to your needs.

Additionally, Safe Harbor matching deposits are often required at least quarterly, while non-elective contributions can be made as late as the last day of the following year, so that is another point to consider when choosing among these plans.

Skip Testing Hassle with Safe Harbor

Small business owners often ask, “Is there really no Safe Harbor test?” Most 401(k) plans require compliance testing to determine whether the program meets IRS fairness standards in compensating rank-and-file employees the same as highly-compensated executives, directors, and owners. A plan must pass the annual fairness test in order to maintain its tax-qualified status.

With a Safe Harbor plan, however, you generally don’t have to worry about the most common compliance tests given by the IRS. In exchange for getting a pass on the Actual Deferral Percentage (ADP) test and Actual Contribution Percentage (ACP) test, your company agrees to make a minimum contribution to all your employees’ 401(k) accounts each year – which must be immediately 100% vested.

By contributing on behalf of your employees, you ensure everyone benefits fairly from the plan. Even better, those employer contributions are tax-deductible.

Steps to Set Up A Safe Harbor 401(k)

Companies interested in the benefits of a Safe Harbor 401(k) will need to:

Determine whether this type of 401(k) best suits their needs. There are many alternatives–traditional 401(k)s, SIMPLE 401(k)s, and solo 401(k)s. Each plan differs in rules and requirements, as well as pros and cons. Generally speaking, startups and modest-growth companies fare well on Safe Harbor plans, whereas highly profitable firms may consider defined benefit plans later on.
Develop a written plan. Ubiquity will help you decide on key provisions of the plan, draw up a written notification for employees, and establish the plan on record within appropriate IRS deadlines.
Decide how you will fund the plan. How will you invest the money – in a traditional brokerage account, bank funds, or out of self-directed assets like real estate? Are you making pre-tax or Roth contributions? Are you making employer contributions under a profit-sharing plan
Administer the plan. Plan administration can be very complex. Employers who fail to administer the plan in compliance with the law can face severe penalties. A Ubiquity Safe Harbor Plan can help give you peace of mind, knowing you have a partner in compliance.

Are You Ready to Enroll in a Safe Harbor Plan?

Business owners who start a Safe Harbor 401(k) Plan generally meet one or more of the following criteria:

They’ve been thinking about matching employee contributions as a matter of competitiveness.
They’re tired of worrying about nondiscrimination testing or they’ve consistently failed tests in the past.
They have low retirement savings participation rates among their rank-and-file employees.
They want to take care of their employees as a matter of conducting good business.

In a nutshell, a Safe Harbor 401(k) plan is a great retirement option for small business owners who are looking to make the maximum contribution to their plans. You’ll enjoy happier employees, tax savings, the certainty that your plan will not fail crucial testing each year, and more retirement savings for your team and yourself.

To get started with adding a Safe Harbor provision to your 401(k) plan, contact the experts at Ubiquity today!

Our team is ready to show you how easy IRS-compliant retirement saving can be.

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