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Category: Safe Harbor

Find information relating to Safe Harbor Plans and from Ubiquity Retirement + Savings. Find easy to understand rules and regulations, along with tips and advice from our team of Retirement Planning experts. Call Ubiquity today for a Free Consultation at 855.466.5825.

Dollar folded like a boat promoting that you can "Keep taxes at bay" with a Safe Harbor 401(k) plan

Deciding to offer employees a 401(k) savings plan is a huge stride toward making your business more competitive and preparing yourself for retirement. But which type of 401(k) is right for you and your enterprise?

A Safe Harbor 401(k) is one popular choice, particularly for small businesses, as it allows you to bypass many of the administrative hassles associated with a Traditional 401(k) – most notably the auditing and annual nondiscrimination testing.

Why Choose a Safe Harbor 401(k) for Your Small Business?

Here are ten reasons that a Safe Harbor 401(k) might be the right choice for your business:

Skip Annual Auditing and Nondiscrimination Testing

Nondiscrimination testing ensures that all employees receive the same fair tax advantages, whether they are highly compensated or rank-and-file members of the organization. Plans that fail testing must be remedied immediately or face substantial penalties and risk having the entire plan balance refunded. If regular employees aren’t putting enough into savings, the highly compensated employees may need portions of their contributions refunded to them. An alternative – though costly – solution would be for the business owner to make increased contributions to regular employees to bring them up to par – thus adding an unexpected and potentially exorbitant expense.

A Safe Harbor 401(k) allows employers to disregard the nondiscrimination checks and balances, so long as they agree to make a guaranteed contribution to all employees. Options include:

  • A Nonelective Contribution worth 3% of every employee’s salary, regardless of participation in the plan
  • A Basic Match worth 100% of the first 3% of employee contributions and 50% match on the next 2%
  • An Enhanced Match worth 100% on 4-6% of employee contributions.

Prepare for Your Own Retirement and Increase Personal 401(k) Savings

Like a Traditional 401(k), a Safe Harbor 401(k) is an ideal way to save for retirement with pre-tax income. In 2020, you can contribute up to $19,000 a year or $25,000 if you’re turning 50 or older this year. A 3% contribution to all employees gives you the freedom to maximize payments for yourself, highly-compensated employees, and key executives, regardless of what others choose to do.

Incentivize Highly-Compensated and Key Employees

A 401(k) Safe Harbor Profit Sharing Plan allows employees to retain control over what they personally set aside for their own retirements, while allowing employers the ability to make vested contributions that will pass nondiscrimination testing even if some employees want to invest to the max. By adding profit-sharing plan contributions, you can adequately reward the company’s most-prized talent up to the individual maximum of $56,000.

Boost Employee Engagement and Benefits Usage

What good is it to offer an employee benefit that no one uses? Lack of participation can be a major problem for small businesses, especially if employees feel the benefits are too costly or difficult to understand. Worse yet, some employees may be uneducated as to the benefits of a 401(k).

Regardless of the reason for low participation rates, you can remedy the situation by choosing automatic enrollment during the Safe Harbor setup. Unless employees specifically opt out, a standard deduction will be put into their retirement accounts.

Making Safe Harbor matches is another way to get employees participating in their own plans. At worst, the 3% nonelective contribution will ensure adequate participation levels to allow you and HCEs the opportunity to maximize savings.

Satisfy and Retain Employees with Mandatory Contributions

The vast majority of modern 401(k) plans include an employer match, so you’ll need one anyway if you want to compete for talent and retain your workers. By opening a Safe Harbor plan, you’re incentivizing employees to remain committed to the company. You’re demonstrating that you are likewise committed to their financial security and wellness, too.

Save Money at Tax-Time

As the employer, you receive additional tax savings for making Safe Harbor contributions. All contributions can be deducted as a “business expense” on your federal income tax return and are free from your payroll tax obligation.

Gobble Up Juicy Tax Credits

New 401(k) plans (regardless of Safe Harbor or not) can be eligible to receive up to $16,500 in small business tax credits over a three-year period to offset administration expenses. The SECURE Act allows employers to write off up to $5,000 per year or 50% of the plan’s startup costs, each year for the first three years. Administrative cost write-offs include plan setup, annual maintenance, and employee education.

Enjoy Maximum Plan Flexibility

No business year is the same. At some point, you may wish to make more or less generous contributions to the plan. Safe Harbor 401(k)s can be amended at any time during the year. You can alter the match formula or remove a Safe Harbor provision entirely with 30 days’ notice. The Safe Harbor can be later reinstated or ramped up, as economic conditions permit.

Reduce Administrative Burdens

A Safe Harbor is not the only way to avoid nondiscrimination rules, but it is the easiest, from an administrative standpoint. While Safe Harbor plans do come with a lot of requirements, they aren’t any harder to administer than Traditional 401(k)s. In fact, plan administration is a lot easier without the time-consuming expense of auditing and testing. At Ubiquity, we are happy to ensure your contributions, notice requirements, and participant disclosures are all on schedule.

Since 1999, Ubiquity has been a low-cost small business 401(k) plan provider with a genuine stake in your company’s success. We are happy to discuss the benefits of a Safe Harbor vs. a Traditional 401(k) and provide you with a Safe Harbor free consultation to explore all your benefits options. When you’re ready, we can have you set up in just a few minutes to start enjoying tax and retirement savings right away.

Dollar folded like a boat promoting that you can "Keep taxes at bay" with a Safe Harbor 401(k) plan

Getting ready to offer a 401(k) retirement plan to your employees? Way to go!

Offering benefits your employees want and need is a foolproof way to attract and maintain incredible talent. Along with an uptick in employee satisfaction, you’ll also gain more tax-deferred savings—it’s a win-win.

Before you go skipping into a field of “I’m-the-best-boss” bliss, keep in mind that offering a 401(k) plan comes with added responsibilities. One of these tasks is making sure your plan is run fairly, and that everyone has the opportunity to fully participate— not just owners and other company bigwigs.

Contributing to a 401(k) comes with significant tax advantages, so the government wants to make sure your plan doesn’t unfairly benefit the company owners and the highest earners. (You may hear these groups referred to as “highly compensated employees” or “HCEs.”) The IRS set up a series of nondiscrimination tests to ensure your plan is fair and encourages participation from all employees.

The IRS Gives Tests?!

There are 3 annual nondiscrimination hoops to jump through.

  • The Actual Deferral Percentage (ADP) test: This limits the percentage of compensation that HCEs can defer into their 401(k) based on the average contribution rates of the non-highly paid employees.
  • The Actual Contribution Percentage (ACP) test: This ensures that the employer matching contributions and any after-tax employee contributions contributed for HCEs are not disproportionately higher as compared to non-highly paid employees.
  • The Top Heavy Test: This ensures that HCEs cumulatively hold less than 60% of the total plan balance.
    In essence, ADP and ACP testing both make sure your plan doesn’t unfairly benefit HCEs, while the Top-Heavy test ensures they aren’t the main people contributors to your plan.

If your plan fails one of these tests, it’s an administrative nightmare filled with costly correctives and piles of paperwork. You may have to return a portion of the contributions made to HCEs or make additional contributions for the lower paid employees. But hurry, if you take too long to make the plan corrections, you’ll owe a 10% penalty. The IRS has Fix-it guides for both ADP/ACP failure and Top Heavy failure but it’s best to prevent problems before they happen.

Skip the hassle with Safe Harbor

Are you already covered in stress hives at the thought of complicated compliance testing? Trust me, we understand. You’re already running a business and trying to maintain some semblance of a work/life balance—the last thing you need is more administrative headaches. That’s where Safe Harbor 401(k) plans come in.

A Safe Harbor plan is specifically structured to automatically pass non-discrimination tests, or avoid them all together. In exchange for getting an automatic pass on the ADP and ACP tests and the extra administrative duties that go with the testing process, business owners must make a minimum contribution to the plan each year—which must be immediately 100% vested.

Here’s how it works:

Are there Safe Harbor deadlines?

Yes! If you are starting a brand new 401(k) plan and want to have Safe Harbor take effect in the current calendar year, your plan must be fully set up and active by October 1, 2019.

Keep in mind, designing a plan to suit your needs (along with all associated admin tasks) takes time. This means that the very latest you should be finalizing your plan is September 20, 2019.

Is Safe Harbor Right for me?

A Safe Harbor 401(k) can seem like an obvious choice—but it may not be the best option for every plan. Safe Harbor plans are a great fit for small businesses (particularly those with under 25 employees) and businesses that have failed noncompliance testing in the past. But while you save in administrative hassle, you may pay a bit extra in plan costs and required contributions.

Weighing the pros and cons of a Safe Harbor plan for your business can be challenging—without all the additional hassle of setting up a 401(k). Luckily, our experts at Ubiquity can walk you through the plan design options and the setup process to make sure your plan is designed to fit perfectly to your needs.

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© 2020 Ubiquity Retirement + Savings
Privacy Policy
44 Montgomery Street, Suite 3060
San Francisco, CA 94104
Support: 855.401.4357

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