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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 reward 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) plan that ensures all employees at a company have some set of minimum contributions made to their individual 401(k) plans, 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.

If you currently have a 401(k) plan that is not safe harbor, you will have to wait until the next calendar year to be able to launch safe harbor (the deadlines for this are explained below).

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

  • Elective (enhanced match): Company matches 100% of all employee 401(k) contributions, up to 4% of their compensation, OR
  • Elective (basic match): 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 employer contribution.

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 deadlines

October 1st is the deadline to launch a new safe harbor 401(k) plan for the current calendar year. For the first year of a new safe harbor plan, the safe harbor plan must in effect for a minimum of 3 months, which is why October 1st is the deadline to launch.

November 1st (as early as possible in the month): There is a December 1st deadline for employee notices (more on that below!) that determines two November deadlines:

  • If you have an existing safe harbor plan and would like change the type of safe harbor (example: safe harbor enhanced match → safe harbor non-elective), this must be decided prior to December 1st so that the notices can distributed by December 1st (the same 30-day deadline as above).
  • If you have an existing 401(k) plan that's not safe harbor, to amend your IRS plan documents to enact a safe harbor 401(k) plan for the following calendar year, you must let your provider know prior to December 1st.

December 1st is the date by which all safe harbor plans, both new and old, must have distributed a notice to their employees (at Human Interest, we take care of this for our clients). The rule is at least 30 days before the first day of the year, so for a plan that will be safe harbor in 2019, December 1st, 2018 is that date.

January 1st is the date on which existing 401(k) plans can begin anew as safe harbor 401(k) plans.
Unfortunately, if you have an existing, regular 401(k) plan, you cannot add safe harbor to it in the middle of the year. If you follow the deadlines above, you can take steps to have it launched for the following year.

A new 401(k) plan, whether it’s safe harbor or not, can be established at any point in the year.

Working backwards from all these deadlines, we recommend letting your 401(k) provider know by mid-October to either amend your current plan documents (existing 401(k)s) or to include it in your new plan documents (new 401(k)s) so that they can get your plan set up, launched, and have all the notices sent by December 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 non-discrimination testing.
  • Automatically satisfy top-heavy testing.
  • 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 notices have to be distributed every year (30 days before the new year begins on January 1st).
  • 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) providers if you ever change your mind and decide to stop offering safe harbor.
  • 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 in terms of administrative work as well.

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-elective safe harbor plan , 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-elective contribution, with 10 employees each earning $60,000 each would contribute $60,000 x 10 x 3% = $18,000 total.

For the safe harbor match, the total cost will depend upon employee contributions, so it is more difficult to predict, but it is typically cheaper overall (in terms of employer cost) than non-elective safe harbor.

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