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.