What You Need to Know About Safe Harbor 401K
If you have never had the experience of managing a 401k for your business, it’s likely that you are unfamiliar with a Safe Harbor 401k and why the provision is necessary.
In this article, we will explain what a Safe Harbor 401K plan is and how you can set one up for your company’s retirement plan.
What is a Safe Harbor 401k Retirement Plan?
When it comes to retirement plans, the IRS wants to make sure that everyone within a company is being treated fairly. This means that higher paid workers should not be benefitting more from the company’s plan than lower-earners.
A Safe Harbor 401k plan makes sure that your company’s retirement plan is considered “fair” by IRS standards.
How Does the IRS Ensure Fairness?
The IRS administers three compliance tests each year to ensure that retirement plans are fair for all workers within a company. The three tests are as follows:
- The ACP Test: The Actual Contribution Percentage Test simply determines whether or not employer matching contributions favor those who are considered “higher-earners” within the company.
- The ADP Test: The Actual Deferral Percentage Test is administered to make sure that higher-earners within the company are not able to defer a significantly higher percentage of their yearly salary as compared with the average percentage of contribution from lower-wage employees.
- The Top-Heavy Test: A top-heavy retirement plan is one where the owner and managers maintain greater than 60% of the plan’s total value.
A failure of one or more of these tests generates significant fines and paperwork that must be addressed by the business owner: an outcome that definitely should be avoided at all costs.
How Does a Safe Harbor 401K Plan Address These IRS Compliance Tests?
A Safe Harbor Plan ensures that your plan is fair for all employees. You have three options for plan structure with a Safe Harbor 401K:
- Non-Elective Contributions: No matter how much an employee contributes to his or her plan, you must contribute a minimum of 3% of employee wages for all those who are enrolled in the plan.
- Basic Matching: With basic matching, you are required to match all employee’s contribution at 100%, at 3% of yearly salary, in addition to a 50% match of the following 2% of employee deferrals.
- Enhanced Matching: With enhanced matching, you are required to match at least 100% of an employee’s contributions, at as much as 4% of their annual salary.
How Can I Set Up a Safe Harbor 401k for My Business?
Setting up a plan or adding a safe harbor provision is extremely simple. But hurry! You’ll need to contact a plan provider by the September 30th, 2021 deadline to initiate a plan and by November 30th, 2021 to add a Safe Harbor provision to an already-in-place plan.
With the deadlines fast approaching, and effects of COVID 19 still limiting some operations, many providers are recommending you contact them even sooner. So, get ahold of your provider by September 23, 2021 to set up your Safe Harbor plan!