There are several ways to avoid the hassle of potentially failing nondiscrimination testing:
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Auto-enrollment
Do the number of Highly-Compensated Employees outnumber the other employees on your plan? If Non-Highly Compensated Employees aren’t aware of the plan or are not deferring enough money, adding automatic enrollment to the plan to require workers to opt OUT, rather than opt IN, can solve that problem. If you offer this generous incentive, naturally, you want employees to benefit from it!
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Communications
Another way to influence employee behavior involves sending out communications to sell the benefits of the plan and encourage more deferrals. It’s wise to regularly monitor the plan and look at participant deferrals to avoid reaching a point where failure is imminent.
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Matching
About half of the small businesses that offer a 401(k) also match employee contributions. It’s a highly effective way to increase total plan assets — if you can afford it. Offering matching contributions can incentivize retirement deferrals. The most common matching formula is to contribute 50 cents for every dollar an employee puts in, to a 6% salary max. Some employers who aren’t doing a standard match may elect to make last-minute deposits into the accounts of non-HCEs (within 2.5 months of the plan year’s end) to bring them up to par with the HCE contributions. This is a last-ditch effort to avoid the 10% IRS penalty.
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Reducing
A less popular way to avoid nondiscrimination test failure is for Highly-Compensated Employees to reduce their own deferrals to avoid getting a refund later. A general rule of thumb is to keep the HCE group contributions below 125% of the non-HCE group contributions. If the deadline is nearing and failure looks likely, refunds can be sent to HCEs if necessary.
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Plan design
If you can afford to make matching contributions, adding a Safe Harbor provision to your 401(k) plan is the best way to exempt your business from ACP/ADP testing and most likely top heavy testing as well. Employers can choose to match employee contributions (100% of the first 3% and 50% of the next 2%) or contribute 3% of a worker’s salary, regardless of employee participation, to avoid all testing requirements.
Maximize Elective Deferrals and Skip Testing with a Safe Harbor 401(k) Plan
Safe Harbor is a way to ensure that:
- 401(k) plans pass annual discrimination testing
- Business owners/HCEs at your company can take full advantage of the maximum 401(k) limit
Employers who offer generous retirement savings programs are more likely to attract and retain top talent. Freeing workers from financial worries of the future not only boosts their immediate productivity but also ensures that employees retire when they are ready. Timely retirements allow a healthy influx of entry-level workers, boost mid-level advancement opportunities, and increase morale within your company.
Consider these advantages of a Safe Harbor 401(k) plan with Ubiquity:
- Highly compensated employees and owners can maximize their elective deferrals.
- There is no complicated auditing or non-discrimination testing to worry about each year.
- Additional profit-sharing contributions are allowed with a vesting schedule.
- Employees may make pre-tax salary deferrals of up to $22,500 (or $66,000, including employer match)
By adding as little as 3% to payroll, a Safe Harbor 401(k) provides freedom from administrative burdens and maximized payments for business owners and key employees whose contributions would be limited in a traditional 401(k) plan.
How is a Safe Harbor 401(k) Like Other Types of 401(k)?
Like any 401(k) plan, a Safe Harbor:
- Allows employer and employee contributions from salary to save for retirement with pre-tax income.
- Permits savings up to $22,500 for employees and $66,000 when employer matching is factored in.
- Permits an additional $7,500 in savings for eligible employees over 50 years of age.
- Can be traditional (not taxed until retirement) or Roth (taxed now to alleviate the tax burden later).
- Exempts employers from paying tax on the amount contributed to the plan.
- Allows employers to claim an additional tax credit of up to $5,000 for plan startup costs each year for three years.
How is a Safe Harbor 401(k) Different Than Other Plans?
Contact Ubiquity for details on pursuing a Safe Harbor 401(k) plan. Mandatory employer contributions make this type of 401(k) plan unique. The employer contributions must be 100% vested immediately, but may be based on one of the following formulas:
- A basic 100% match on the first 3% of employee contributions and a 50% match on the next 2%.
- An advanced 100% match on the first 4-6% of employee contributions.
- A non-elective 3% match of every eligible employee’s salary, regardless of participation in the plan.
By taking these steps, you won’t have to worry about testing or restricting contributions beyond the IRS maximum limits. Thanks to the SECURE Act, it is now possible to make changes to your plan to add the Safe Harbor provision before the end of the plan year.
