One of the most popular 401(k) Plans, Safe Harbor is great for owners and employees alike. The Safe Harbor plan design allows business owners to provide retirement benefits to their employees while simultaneously ensuring they can save at the maximum rate allowed by the IRS. While Safe Harbor plans offer many benefits, there are strict rules that must be followed and some potential drawbacks that must be considered. In this post, we will provide you with information that may help you need to decide if a Safe Harbor 401(k) plan is right for you.
Let’s start by defining a Safe Harbor plan. It is a type of tax-deductible 401(k) plan that ensures all employees receive some level of contributions to their 401(k) plans. Safe Harbor rules mandate that a company makes contributions to each eligible plan participant regardless of their position, salary, or status of employment. These contributions must be immediately 100% vested to the participant. Safe Harbor plans can be designed using one of three different employer contribution formulas, of which two feature employer matching.
Basic Safe Harbor Match: In this plan design, the employer matches 100% on the first 3% and 50% of the next 2% of elective deferral for each eligible participant. A participant must contribute to receive the Safe Harbor Match.
Enhanced Safe Harbor Match: The Employer makes Safe Harbor matching contributions of 100% on the first 4% of elective deferrals for each participant. A participant must contribute to receive the Safe Harbor match.
Non-Elective Safe Harbor: In this design, 3% of compensation is contributed to all eligible participants. A participant does NOT need to contribute to receive the Non-Elective Safe Harbor contribution.
Regardless of the method, there are several requirements that must be met:
· Participants must receive a Safe Harbor notice before each Safe Harbor plan year.
· The plan document must have a provision allowing the plan to utilize a Safe Harbor method.
· One of these two options is required:
o Safe Harbor non-elective contribution must be provided to all eligible participants
o Safe Harbor matching contributions must be provided to all participants who make a
401(k) salary deferral.
· The plan’s initial eligibility requirements to enroll and become a participant must still be met.
Now that we have defined Safe Harbor plans and outlined the rules and requirements, let’s look at how you may benefit from a Safe Harbor plan design. Safe Harbor plans eliminate the need for annual Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP) Tests. This allows highly compensated employees to defer the maximum. This plan design may also eliminate the need for top-heavy tests. A Safe Harbor plan design will work best if your company has a plan that routinely fails ADP/ACP tests or a top-heavy plan with a low non-highly compensated employee participation rate.
The biggest drawback of a Safe Harbor Plan is the cost. If every employee participates in the plan, your overall payroll will increase by the percentage that is determined in the contribution formula you have selected – at the very least it would be 3%. However, many employers still opt for the Safe Harbor plan design because the extra expense is outweighed by the benefits.
If you are considering a Safe Harbor plan for your organization, here are some deadlines to note. Plans, in general, must implement a Safe Harbor provision before the first day of any Safe Harbor plan year. There are exceptions to this rule in the SECURE Act that your TPA/Consultant can discuss with you. A 30-day advance annual notice must be given to all eligible employees.
Whether you are still questioning if a Safe Harbor plan is right for or are interested in implementing a Safe Harbor Plan, we want to be of assistance. Let us know how we can help you reap the benefits of a Safe Harbor plan!