What Do I Need to Know About Safe Harbor 401K Plans?

The Safe Harbor 401K is a highly advantageous kind of retirement plan that allows employees to maximize their retirement contributions without imposing administrative woes on their employers. Business owners who administer 401K plans with Safe Harbor provisions will be able to completely bypass the headache of ADP, ACP, and Top-Heavy IRS non-discrimination testing, while still giving employees the utmost freedom in contribution and matching options. To learn more about Safe Harbor 401K plans, see the information below.

What Exactly is a Safe Harbor 401K Plan?

The Safe Harbor 401K plan is one of the many types of retirement plans that allow employees to contribute to their future by deferring funds into an employer-sponsored account. Yet, not all 401K plans require employers to match the contributions made by their workers. This is just one of the Safe Harbor plan’s many unique features: Whether an eligible employee wishes to participate in the plan or not, the company is required to contribute a minimum 3% match of the gross annual salary to their 401K.

This option is known as the “non-elective contribution.” It serves as a significantly appealing facet that attracts new employees and retains the ones you’ve got. Other matching options available with a Safe Harbor provision include:

  • Basic: As the company owner, you would be obligated to match 100%, dollar-for-dollar, your employees’ 401K contributions up to 3% of their annual earnings. Additionally, you must provide a 50% match to the subsequent 2% of their deferred funds.
  • Enhanced: You would provide a dollar-for-dollar match to all employee 401K contributions for up to 4% of their deferrals.

Note that these are minimum expectations. You can always choose to increase the rate at which you match if you wish. For example, the enhanced matching option allows employers to provide a match of up to 6% if the minimum expectation is not satisfactory.

This is great for increasing the contribution levels of non-HCEs (highly compensated employees) relative to HCEs to pass compliance tests such as the ACP (Actual Contribution Percentage). Fortunately, a Safe Harbor provision essentially guarantees your compliance with such IRS (Internal Revenue Service) standards.

Special Advantages of the Safe Harbor Plan

Safe Harbor 401K plans have been determined by the IRS to pass three tests annually distributed by the IRS automatically:

  • Top Heavy: In an effort to prevent economic discrimination within your company, the IRS will examine your account to verify whether HCEs retain more than 60% of the total balance in the company 401K plan.
  • Actual Deferral Percentage (ADP): The IRS strictly prohibits partiality to HCEs and “key employees” (i.e., major stakeholders, those who own more than 5% of the company, etc.) concerning contribution amounts and the percentage of assets owned in the plan. The ADP test examines potential discrimination in your business by comparing the average annual salary and contributions of HCEs to all other employees.
  • Actual Contribution Percentage (ACP): This test is done for the same reason as the ADP; however, it turns the spotlight on the employer contributions instead of the workers’. Business owners who do not exceed a 125% ratio of HCE-to-non-HCE contributions are found to be compliant with this standard.

To take advantage of these benefits and more, get in touch with a 401K plan provider to write and administer a Safe Harbor provision that is unique to your business’ needs.

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