A popular retirement solution for small business owners
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 firstname.lastname@example.org 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.
Most retirement plans are designed for a January 1 start. Based on this date, deadlines include:
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.
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:
Employers can choose one of three types of Safe Harbor 401(k) matching:
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.
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.
Companies interested in the benefits of a Safe Harbor 401(k) will need to:
Business owners who start a Safe Harbor 401(k) Plan generally meet one or more of the following criteria:
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!