As a small business owner, you understand the importance of a retirement plan that benefits you and serves your employees. Enter the non-elective Safe Harbor 401(k) plan, a retirement option with significant advantages for employers and employees.
Safe Harbor 401(k) plans require employers to contribute to eligible employees' 401(k)s. Business owners can choose between providing a Safe Harbor 401(k) Match or a non-elective employer contribution.
Despite the required employer contribution, Safe Harbor plans are popular because they are easy to administer, popular with employees, and allow highly paid employees (HCEs) to maximize their annual 401(k) contributions reliably. They can also be a powerful way for business owners to lower their personal taxes.
A Non-Elective Safe Harbor 401(k) automatically passes key IRS-mandated nondiscrimination tests, simplifying end-of-year compliance work. Employers must contribute at least 3% of pay to every eligible employee. This contribution is mandatory, regardless of whether the employee contributes to the plan. However, an employer can choose an Enhanced Non-Elective Safe Harbor plan where they contribute more than 3%.
A Traditional Safe Harbor 401(k) must provide a 4% match. However, this is only for employees who are saving into the plan.
Both types of Safe Harbor plans enable employers to pass annual nondiscrimination tests automatically. This ensures HCEs and key employees can contribute the maximum amount each year without any refunds or additional employer contributions.
A Non-Elective has several advantages compared to Safe Harbor Match:
The non-elective contribution option is attractive. It allows employers to contribute a percentage of each eligible employee's compensation to their retirement account. This is regardless of whether the employee contributes their own money.
Once an employer has chosen the amount of their non-elective contribution, they must calculate plan-eligible compensation. This compensation is usually W-2 wages (i.e., W-2, Box 1), however, employers can exclude pay like overtime or bonuses. If you exclude income, you must comply with specific IRS rules, which can get complicated quickly.
Employers have the option of making this contribution on an ongoing basis or at the end of the year. The timing of the employer contributions must be specified in the plan document. If you choose year-end funding, you must fund this contribution no later than when you file your taxes. Filing a tax extension will also extend the deadline for funding the non-elective contribution.
The non-elective Safe Harbor 401(k) plan is an excellent option for small businesses for several reasons.
First, the plan simplifies administrative tasks by removing the need for certain annual compliance tests. This is particularly beneficial for small businesses, which often operate with limited resources. Moreover, non-elective Safe Harbor plans may have easier notice requirements than other Safe Harbor options.
Safe Harbor plans allow highly compensated employees (HCEs) and Key Employees to maximize their 401(k) savings without the risk of refunds or additional required contributions due to failed compliance tests. This can be a significant advantage for small business owners looking to maximize their personal retirement savings - especially with profit-sharing plans.
Third, the non-elective contributions ensure that all employees receive some level of retirement contributions, regardless of their savings levels. This can help to increase overall employee satisfaction and retention.
Non-elective plans can be combined with profit-sharing plans to help business owners save up to $66,000 in 2023 (or $73,500 with 50+ catch-up contributions). These plans allow owners to target additional contributions to highly-paid workers, older workers, or more tenured employees.
Every small business owner understands the importance of a robust retirement plan. It secures a comfortable future for employees. Additionally, it is an essential tool for attracting and retaining top talent. One such potent tool in the retirement plan arsenal is the Safe Harbor 401(k) plan.
Safe Harbor 401(k) plans are increasingly popular among small businesses. In fact, a 2022 study found that nearly half of Safe Harbor retirement plans chose a non-elective plan design. These plans automatically pass certain annual tests that conventional 401(k) plans are subject to by adhering to two key requirements - mandatory contributions and participant notices. The outcome is a win-win situation where business owners, especially highly compensated employees, can maximize their annual contributions without fearing additional employer contributions due to failed testing. This assurance, coupled with the flexibility of contribution options, has made the Safe Harbor 401(k) plan the preferred choice for many small businesses.
Within the Safe Harbor 401(k) plan, there are several mandatory contribution options, with two primary categories being the Traditional Safe Harbor, the Enhanced Safe Harbor, and the Qualified Automatic Contribution Arrangement (QACA) Safe Harbor. QACA allows business owners to add a Safe Harbor 401(k) with 2-year vesting. This is great for employers with high employee turnover.
The non-elective Safe Harbor 401(k) plan has several advantages that make it attractive to small businesses. Here are a few reasons why you should consider it for your company:
While the non-elective Safe Harbor 401(k) plan offers many benefits, it's crucial to assess your specific business needs and consult a qualified professional.
David Ramirez, CFA, is a recognized 401(k) expert with over 20 years of experience in 401(k), ERISA, cash balance plans, and ESOPs. A UC Berkeley graduate, he played a pivotal role at Financial Engines, a 401(k) advisory firm founded by Nobel Laureate William Sharpe, Ph.D., where he was a portfolio manager who helped manage over $50B in 401(k) assets. His clients included some of the largest Fortune 500 companies and state governments.
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