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What’s So Safe About Safe Harbor?

Dylan Telerski / 11 Jun 2018 / 401k Resources

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 “HCE”s.) 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 401k 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 the problem before it happens.

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.

Are there Safe Harbor deadlines?

Yes! If you are starting a brand new 401k 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 1st.

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 21st.

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.

Participating in your first retirement savings plan can seem overwhelming and may stir up a whirlwind of questions. Remember: even though getting started can be difficult, you are taking an important step in investing for your future.

As you navigate your company’s retirement benefits, talking with your Human Resources (HR) person, department, or whoever is managing your company’s plan, is your best place to start.

For some insight on how your HR department can help you get your savings plan in gear, we sat down with our own HR people here at Ubiquity Retirement + Savings.

Q: Does being overwhelmed prevent individuals from enrolling in retirement plans? Are there any other reasons why people don’t enroll?

A: It’s not necessarily that employees feel overwhelmed with choices, but rather, depending on their age, they feel overwhelmed with their financial situation and obligations. Employees just now entering the workforce have always heard they need to save for retirement. But because that date is so far in the future, many don’t feel it’s the proper savings vehicle, especially when they may have student loans to pay off, for example.

It’s hard to conceptualize an event that is 30 to 40 years in the future. For people in the middle of their careers, it’s almost a no-brainer that you must establish retirement savings. Depending on your financial situation, saving any amount from your paycheck can be difficult. Still, most people who are GenX and Y know they need to open a 401k sooner than later. Probably the biggest reason for not enrolling is the lack of extra funds. If someone is living paycheck to paycheck, there isn’t much to save.

Q: What’s the best way for employees to learn their options for retirement savings vehicles at their company?

A: The best way would be to ask their HR department, or if they are at a small business, to approach the owner or person responsible for payroll and benefits. At companies with dedicated HR departments, it’s important to continually remind employees of this benefit. Having a “benefits fair” is a great way to educate and publicize the options available to employees. If an employee learns there isn’t a retirement plan available, I would encourage them to educate their HR department or company owner on how these plans benefit the company. Retirement plans attract and retain talent, and the associated tax savings almost entirely cover any additional costs.

Q: If an employee is new to a company, how should they approach HR to inquire about retirement benefits?

A: A good HR practice is always to have information on benefits available to employees and to go over this at orientation or in new hire meeting. A lot of established companies have defined new hire orientations and a section on benefits is part of that.

However, even at a smaller firm, you still have an onboarding meeting where you have to complete administrative paperwork. If an employee doesn’t notice any information on retirement when completing this new hire paperwork, that would be the time to ask.

Q: If an employee is not currently enrolled in a retirement savings plan, how can they get started?

A: First, look at your paycheck and current financial obligations to determine what percentage of your income you can save. Then, speak to your plan sponsor and find out when you can start contributing. It’s important to remember that it’s not a direct calculation where if you decide to save $200 per paycheck your net check is automatically $200 less. With the tax benefit, you are getting taxed less, so your net paycheck might only be $150 less.

Q: Why are company match programs especially important when choosing an employer?

A: Two words: FREE MONEY! That match is so important because it’s literally free money that is going into your savings vehicle. At a minimum, you should always contribute as much as your company will match, otherwise you are leaving cash on the table.

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© 2018 Ubiquity Retirement + Savings / Privacy Policy
1160 Battery Street, Suite 350, San Francisco, CA 94111 / Support: 855.401.4357