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Safe Harbor 401(k) Plans: Everything You Need to Know

At Human Interest, we support all different kinds of retirement plans for small businesses. But one plan we recommend quite often is the safe harbor 401(k) because it's a great way for employees to rewward employees and simultaneously save themselves tons of administrative hassle. So, what's so special about a safe harbor plan?

What is a safe harbor 401(k) plan?

A safe harbor 401(k) plan is a type of tax-deductible 401(k) match that entitles all eligible employees in the company to the same match, regardless of their title, compensation, or length of service. A major perk of this particular plan is that it also helps companies pass IRS non-discrimination testing - one of the checks that the IRS puts on 401(k) plans to make sure they're equitable to all employees. Ultimately, it's a nice thing to do to help employees save more money in their retirement funds, and also reduces administrative overhead.

For additional context, you can also read more about certain features below:

Requirements of a safe harbor match

Anyone who currently has a 401(k) plan can offer a safe harbor match. If you are about to, or are in the middle of, signing up for a new 401(k) plan, you should ask about safe harbor in advance. Most 401(k) providers (including Human Interest) have it as an option, as it’s generally recommended for most small companies.

Here are the minimum match requirements. You must meet ONE of the following to be considered a legal safe harbor plan:

  • Elective: Company matches 100% of all employee 401(k) contributions, up to 4% of their compensation, OR
  • Elective: Company matches 100% of all employee 401(k) contributions up to 3% of their compensation, plus a 50% match of the next 2% of their compensation, OR
  • Non-elective: Company contributes 3% of each employee’s compensation, regardless of whether the employee also makes contributions

For companies that want to go above and beyond for their employees, they can offer a higher percentage match and still qualify for safe harbor. However, most of our clients, and most safe harbor 401(k) plans in general, typically just offer the simple 4% match (option 1). The first two elective options are probably better suited for you if you want to actively encourage your employees to contribute by motivating them with the matching employer contribution. Non-elective essentially means the employee could contribute $0 and still receive the company match.

Unlike other types of matching, in which employers can choose a certain vesting schedule, safe harbor matches must be immediately vested for all employees.

Safe harbor deadline

October 1st is the deadline to establish a new safe harbor 401(k) plan for the current calendar year, or for amending the IRS plan documents for existing plans to enact a safe harbor 401(k) plan for the following calendar year.

January 1st is the date on which existing 401(k) plans can begin anew as safe harbor 401(k) plans.

A “regular” 401(k) plan that doesn’t include a safe harbor match can be started pretty much at any point in the year. Regardless, whether you already have a 401(k) plan or not, you have to decide whether or not you’d like to go the safe harbor route a few weeks before October 1st. Then, you’ll have to let your 401(k) provider know to either amend your current plan documents (existing 401(k)s) or be sure to include it in your new plan documents (new 401(k)s) so that they can get your plan set up by October 1st. Once that’s established, you’ll be able to officially offer safe harbor starting January 1st of the following year.

Benefits of having a safe harbor 401(k) plan

Remember that the government really wants to encourage and incentivize 401(k) plans by offering lots of tax benefits to both employers and employees; however, it also wants to make sure that employers are not taking advantage of these great tax benefits while excluding employees. This is why the IRS administers 401(k) non-discrimination testing. A safe harbor plan was designed to help make it easier to pass NDT.

  • Automatically pass 2 out of 3 non-discrimination tests.
  • Allow all employees to contribute the maximum allowable amounts to their 401(k).
  • The company will not have to restrict employee contributions from HCE (highly compensated employees) and company owners or monitor contributions from NHCE (non-highly compensated employees).
  • Provide a tremendous incentive for employees to save for their future. Matches in general will increase your employee participation rate significantly and will also give you an advantage in recruiting and retaining employees, especially if you're competing with larger companies for talent.
  • The match is tax deductible for company. For employees, it’s essentially a tax-free bonus as well.

Disadvantages of a safe harbor 401(k) plan

  • Under the safe harbor match, you need to commit to the plan for 1 year, and this needs to be renewed on an annual basis.
  • There are specific annual deadlines and requirements, so if you decide to offer safe harbor, it may take a few months to take effect.
  • There is a termination fee charged by some 401(k) recordkeepers if you ever change your mind and decide to stop offering the safe harbor match.
  • If you have a profit sharing plan then you will still be subject to top-heavy non-discrimination testing.
  • It can be relatively expensive, depending on the salaries of your employees.

Essentially, a safe harbor plan's main benefit is convenience (less testing hassle and flexibility in contributions) but the downside is that it's not free, and comes at a slight cost.

How much does a safe harbor 401(k) plan cost?

The more employees you have, and the higher their salaries are, the more expensive a safe harbor 401(k) will be for your company.

If you offer a non-discretionary safe harbor match, it will be easier to calculate the total budget for the plan, as it is that percent of your total payroll. So for instance, companies offering a 3% non-discretionary match, with 10 employees each earning $60,000 each would match $60,000 x 10 x 3% = $18,000 total.

For the most typical kind of safe harbor match, the discretionary match, otherwise known as dollar-for-dollar match, the total cost will depend upon employee contributions.

If you're looking for a great 401(k) for your employees, click here to request more information about Human Interest.