Don’t let the ship of generous perks sail without your clients on board
What is so safe about a “Safe Harbor” 401(k) plan? They’re among the most popular types of 401(k) plans with an employer match (an incentive given to those who actively participate) or nonelective (meaning the participant merely needs to meet eligibility requirements to receive it) that allows employers to avoid some of the hassle of annual compliance tests. This specifically includes the frustrating ADP/ACP and nondiscrimination tests. Thus, these plans keep employers “safe” from testing and the headache of potential corrections. In some cases, they can even mitigate top heavy issues. Business owners can kiss the anxiety of many of the annual tests goodbye. This allows them to focus on attracting and retaining great employees through this sought after 401(k) plan.
Put the Wind in Your Clients’ Sails: Key Advantages of a Safe Harbor Plan
One of the most significant advantages of a safe harbor plan is its meaningful contributions to employees that are immediately vested (unless it’s a QACA). These plans incentivize employees to stay with the employer who cares to help them save for retirement. This helps the employee, and the employer with retention, as well. According to BP Group Solutions, 92% of employees ranked “workplace savings and retirement plans” a significant factor in deciding whether to remain with their employer.
Safe harbor plan designs exempt the plan from many of the complex annual nondiscrimination tests. They also result in tax savings and other tax advantages for the company and employees. For employers, costs for implementing and running the plan, along with contributions, are tax deductible and free from payroll taxes. Employees may reduce their taxable income through pre-tax contributions or await the promise of tax free withdrawals by utilizing Roth contributions.
A Solution to a Traditional 401(k) Plan’s Potential Anchors…a Safe Harbor Plan!
With a traditional 401(k) plan, employers and highly compensated employees (HCEs) may be limited in how much they can contribute to the plan. These plans have the nondiscrimination testing we reference above. This includes the general rule that HCEs can’t contribute more than 2% of the average of all other employees eligible to participate. These limitations might mean a traditional plan is not the best fit for certain businesses and owners who want to contribute more.
Knot too Bad: Contribution Requirements for Skipping the Tests
In order to skip testing and contribute without regard to other employees’ contributions, employers must choose to offer all employees one of the options below:
- Employer $1 for $1 match up to 4% of the employee’s elected salary deferral
- Employer $1 for $1 match on the first 3% of the employee’s elected salary deferral and a 50% match on the next 2% of the employee’s elected salary deferral (4% total match when the employee defers at least 5% into the plan)
- Employer nonelective contribution of 3%, regardless of employee contributions into the plan
- QACA: Employer $1 for $1 match on the first 1% and a 50% match on the next 5% of the employee’s elected salary deferral (3.5% total match when the employee defers at least 6% into the plan). This requires automatic enrollment requirements and allows for a 2-year vesting schedule.
- QACA: Employer nonelective contribution of 3%, which also requires automatic enrollment requirements and allows for a 2-year vesting schedule. The SECURE Act eliminated the safe harbor notice requirement for SHNEC plans. While employers can still send notices, they are no longer required.
Employers can choose to make their contributions more generous than the options above, but never less. As mentioned previously, all contributions must be vested 100% immediately (unless a QACA). Employers must also distribute a participant disclosure at least 30 days before the plan’s implementation and annually after.
What it’s all A-boat: Safe Harbor Success in the Real World!
Francine & Ernest’s Fabulous Burgeria has a passion for their associates. They started a 401(k) plan using a generous 50% of deferrals up to 8% of pay match with a four-year vesting schedule. Though they had good participation, the result each year was that Francine and Ernest received corrective refunds. This slowed their progress toward retirement savings.
The EGPS plan consultant pointed out that the employees who participated had been there for over five years and all contributed at least 8% of pay. She presented the safe harbor match design, which cost them no more and allowed both to keep all their contributions in the plan.
Alert: Important Deadline Coming Ferry Soon!
Clients must establish a new safe harbor match plan by October 1, 2022 (SHNEC can be by 12/31 if 3% or 12/31 of the following year for 4%). Too much too soon? Employers can add a safe harbor nonelective provision as late as December 1 (if a deferral feature is in effect by October 1). OR the employer may use a 4% nonelective contribution to implement the safe harbor feature after the year ends.
“Sea-s” the Day: Present Options that Float Your Clients’ Boats!
EGPS is here to help you present your clients with the best options for them. Fill out this short form and we will be in touch to provide more safe harbor resources.