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Coming Soon: The Safe Harbor 401(k) Plan Deadline

By The Human Interest Team

What your small business needs to know

As summer transitions to fall, the race towards the busy season begins, including back-to-school and holiday promotions as well as business planning for the year to come. It is also the time of year for preparing to launch or update a Safe Harbor 401(k) plan for employees at your small business.

The basics

  • What is a Safe Harbor 401(k)?

    A Safe Harbor 401(k) plan is an employer-sponsored retirement plan designed to automatically pass the non-discrimination testing required by the IRS.*

  • Why a Safe Harbor 401(k)?
    1. Since a Safe Harbor 401(k) offers an employer match without the hassle of most annual compliance tests, it can save a lot of work for many small businesses.
    2. Safe Harbor plans can make it easier to save more, hence their growing popularity.
    3. In addition, they confer tax savings for businesses.
  • How does this type of plan work?

    With this type of 401(k), businesses must make annual contributions on behalf of their employees and the contributions are 100 percent vested immediately.

  • The bottom line: A Safe Harbor 401(k) plan ensures that every employee has the opportunity to benefit from a retirement plan, regardless of salary, years of service, title or anything else. That is, that business owners and “highly compensated employees”** do not unfairly benefit from the plan. In an era where nearly half of families have no retirement savings at all, according to the Economic Policy Institute, your small business can spur families in the right direction.

    Employers choose the type of Safe Harbor matching contribution to make

    In Safe Harbor plans, businesses must offer employees a “Safe Harbor” match, which can be either:

    1. A Safe Harbor matching contribution: This type of match is based on how much an employee chooses to defer and put into their 401(k). There are two sub-options:
      • Basic match: Employer matching contributions are a 100% match on the first 3% of compensation plus a 50% match on deferrals between 3% and 5% (4% total).
      • Enhanced match: Employer matching contributions must be at least as much as the basic match at each tier of the match formula. A common formula is 100% match on the first 4% of compensation.
    2. A Safe Harbor nonelective contribution: Regardless of whether or not an employee contributes anything to their 401(k), the employer matches 3% (or more) of that employee’s compensation.

    Here’s an example

    Consider an employee who makes $50,000 per year and makes the maximum contribution they’re allowed. Here’s what they’d earn under each type of Safe Harbor matching contribution:
     Basic matchEnhanced matchNonelective contribution
    Safe Harbor match rule100% of the first 3% + 50% of the next 4%100% of the first 4%3% of salary
    The amount this employee would get in this type of match$1,500 + $1,000 = $2,500$2,000$1,500

    To maximize the benefits of such a plan for your business and for your employees, paying careful attention to a series of upcoming deadlines is critical.

    Keep an eye on the calendar

    For the first year of a new Safe Harbor plan, the plan must be in effect for at least three months, which leads to an October 1st deadline.

    While October 1st is the deadline for starting the new plan, businesses need to work backwards to prepare themselves and their employees. Companies are required to notify all employees about Safe Harbor 401(k) plans a minimum of 30 days before starting a plan. Likewise, it may take five to seven days to set the plan up ahead of the deadline, so it is important to build in another week to give enough time.

    If you want to add Safe Harbor to an existing 401(k), your plan administrator can add an amendment to your plan that will go into effect on January 1st. Again, employees should receive notification at least 30 days ahead of time.

    If you do the math, you will quickly see that time may not be on your side and that you should move quickly if you are planning to launch a Safe Harbor plan for your employees this fiscal year.

    In summary, here are the dates you need to pay attention to:

    1. If you are looking into launching a Safe Harbor 401(k) plan in 2020:
      • Aug. 23, 2019: Set up your new Safe Harbor plan;
      • Sept. 1, 2019: Alert employees of the new Safe Harbor 401(k) plan;
      • Oct. 1, 2019: New Safe Harbor 401(k) plan takes effect.
    2. If you are simply enhancing an existing plan with a Safe Harbor provision:
      • Nov. 30, 2019: Request addition of Safe Harbor to your 401(k) plan for 2020;
      • Dec. 2, 2019: Send notification to employees;
      • Jan. 1, 2020: Safe Harbor provision is effective.

    Setting up a Safe Harbor 401(k)

    If you are interested in a Safe Harbor 401(k) plan for your small business, talk to a plan administrator promptly about whether it is right for your business, as well as timelines for enrollment and communication. Learn more about the popular Safe Harbor 401(k) plans offered by Human Interest.

    Safe Harbor 401(k) plans can be ideal for companies interested in matching employee contributions or those with low participation as well as small businesses that don’t want the hassle of non-discrimination testing. With tax savings and satisfied employees, you will support enhanced savings for all.

    Ultimately, offering a Safe Harbor 401(k) plan for your employees will make it easier for them to save for retirement while simplifying the process on your end. Safe Harbor plans reduce personal taxes for the business owner and contributing employees and give your small business the opportunity to report any matches as a tax-deductible expense. It helps your employees save, reduces your burden as a small business and creates a safe harbor for all.

    However, every plan has a deadline for starting and for making deposits, which is why it is so important to pay attention to the clock and the calendar. Now is the perfect time to start counting the days to the launch of your company’s Safe Harbor 401(k) plan. If you haven’t already, schedule a time to talk with your 401(k) plan administrator about a Safe Harbor plan for your small business.

    *Non-discrimination tests, sometimes called Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP) tests, are annual testing requirements set in place by the IRS to ensure that all employees – not just highly-comepnsated employees (HCEs) or owners – has the opportunity to benefit from a company’s 401(k). Specifically, these tests “verify that deferred wages and employer matching contributions do not discriminate in favor of highly compensated employees.”

    **As defined by the IRS, a Highly Compensated Employee is an individual who:
    • Owned more than 5% of the interest in the business at any time during the year or the preceding year, regardless of how much compensation that person earned or received, or
    • For the preceding year, received compensation from the business of more than $120,000 (if the preceding year is 2015, 2016, 2017 or 2018 and $125,000 if the preceding year is 2019), and, if the employer so chooses, was in the top 20% of employees when ranked by compensation.
    If any employee doesn’t meet these criteria, they’re considered a non-highly compensated employee.

    Want to learn more? See also:

  • How to get ahead of mid-year deadlines for Safe Harbor 401(k) plans.
  • All about QACAs, a newer type of Safe Harbor plan.