Ubiquity Retirement + Savings has been an affordable provider of retirement solutions, including Safe Harbor 401(k) plans, designed for small businesses, start-ups, and solopreneurs since 1999.
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A 401(k) plan offers one of the highest limits for tax-free retirement savings.
However, there is one caveat: your plan must pass annual IRS nondiscrimination tests that prove the plan is fair to all “rank and file” employees, as well as the highly compensated owners and employees. If your plan fails one of these compliance tests, deferral or match refunds may be required. This means the money that would have been put toward your employee’s future will not refund and will be taxable income to the employee. The way to prevent this from happening is to choose a Safe Harbor Plan.
It’s all too easy for a small business to fail annual 401(k) nondiscrimination tests. One analysis found that nearly 60,000 businesses fail their annual tests, resulting in corrective actions, refunds, and penalties.
Inexperienced startups new to 401(k)s were most commonly caught off-guard. All too often, the owner wants to contribute a large sum to a tax-deferred retirement plan, but there are not enough non-Highly Compensated Employees participating in the plan to pass the IRS nondiscrimination requirements.
By definition, a “Highly-Compensated Employee” is a person who owns at least 5% of the company, is a family member of someone who owns at least 5% of the company, or someone earning more than $130,000. Naturally, keeping these valuable employees well-paid and incentivized to stay loyal to the company is a smart business move.
How you design your 401(k) plan affects how much you and your employees can save for retirement and how easy it is to pass required IRS testing.
There are several ways to avoid the hassle of potentially failing nondiscrimination testing:
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!
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.
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.
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.
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.
Safe Harbor is a way to ensure that:
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 at-a-glance:
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.
Like any 401(k) plan, a Safe Harbor:
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:
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.