Human Interest - The 401(k) provider for small and medium-sized businesses

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

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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 employers 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. Employers make annual contributions on behalf of their employees without a vesting period.

There are three different “types” of safe harbor 401(k) plans, and two of them also have employer match programs.

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. It also reduces the administrative overhead of performing multiple annual tests.

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, or an employer matching contribution plan. 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 a safe harbor plan (we will discuss the deadlines for this further below).

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

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. That means employees immediately own 100% of the employer contribution without progressive periods of ownership or delays.

Because safe harbor contributions must be made annually, companies are implicitly required to have strong cash flow in order to meet their commitments. Actively managing your company’s safe harbor 401(k) plan can help ensure your company can make the contributions in full and on time.

Safe harbor deadlines

Oct. 1 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 Oct. 1 is the deadline to launch.

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

Dec. 1 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 2020, December 1, 2019, is that date.

Jan. 1 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 provisions 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 Dec. 1. Once that’s established, you’ll be able to officially offer safe harbor starting Jan. 1 of the following year.

When should your company consider a safe harbor plan?

Safe harbor plans are very beneficial for both employers and employees, as we will describe in the next section. But there are certain circumstances when safe harbor plans are even more advantageous as tools to protect your company. These circumstances include the following:

Safe harbor plans are particularly valuable for small and medium-sized businesses, especially if your key employees want to actively contribute to the company 401(k) plan. Here’s why:

  1. For companies with ten employees or fewer: Having two key employees who want to contribute heavily to their 401(k) can make your company’s plan top-heavy. Changing it to a safe harbor plan allows these key employees to make their preferred level of contributions and keep your company compliant.
  2. For companies with 50-80 employees: Even at companies with dozens of employees, non-HCEs may not be contributing enough for HCEs to max out their 401(k) contributions. However, a safe harbor plan gives them the freedom to contribute more fully without jeopardizing the standing of the company’s plan. This can help incentivize key HCEs to continue their employment with your company instead of looking for more flexible benefit offers elsewhere.

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.

Disadvantages of a safe harbor 401(k) plan

Essentially, a safe harbor plan’s main benefit is convenience — it offers less testing hassle and more flexibility in contributions. However, 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 because 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 a 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.

Vijay Mirpuri Vijay Mirpuri

Vijay Mirpuri, QPA (Qualified Pensions Administrator), is a 401(k) Compliance Manager at Human Interest. He has over 17 years of experience designing, consulting, and administrating retirement plans.

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