Businesses fail nondiscrimination testing all the time. And when they do, it’s a nightmare for HR. If you’ve failed the IRS nondiscrimination test this year, it’s time to see if a Safe Harbor 401(k) plan might be the right choice for you.
But when any change is in consideration, cost comes up pretty quickly. Here’s everything you need to know about Safe Harbor (get a primer on Safe Harbor plans here), matching contributions, how plans work, and the associated costs.
How Much Does a Safe Harbor Matching Contribution Cost?
To get a quick estimate on how much Safe Harbor contributions will cost you, use our handy Safe Harbor contribution calculator and find out the cost for:
- 3% non-elective contributions: essentially 3% of gross pay for every eligible employee, regardless of whether they’re putting their own money into the 401(k) plan.
- 4% match contribution: roughly a 4% match for every employee that is contributing to the 401(k) plan.
It’s a little counter-intuitive, but after a certain point, the 3% non-elective contributions are actually cheaper than the 4% match contribution — this is all dependent on your overall participation and savings rate.
For example, a company with higher employee participation rates could easily find that non-elective contributions are less expensive overall than a company with lower participation and higher savings rates. This is often helpful for businesses looking to maximize owner 401(k) contributions with the minimum expense.
Check out the calculator to see where your numbers fall.
Safe Harbor plans come with an added bonus come tax-time. The company can get tax deductions for matching contributions, this includes Safe Harbor contributions. Learn more about company match tax deductions and limits.
Safe Harbor Plan Alternative: Boosting Participation and Savings Rates
We can’t talk about Safe Harbor plans without bringing up the Safe Harbor alternative.
While offering a Safe Harbor 401(k) plan can give you the freedom to no longer worry about the IRS nondiscrimination tests (ADP, ACP, and Top Heavytests), it’s also possible to tackle the issues directly.
Before going through the rigamarole of changing plan design, it’s always in HR’s best interest to see if there’s a way for the plan to pass these tests simply by working hard to boost participation and savings rates.
Generally speaking, we’re big fans of testing different methods of boosting employee engagement since it’s better for more employees and their long-term retirement savings success. If none of those employee engagement strategies are a good fit, then we explore the option of offering a Safe Harbor plan. This saves time, money, and effort all around - HR wins, right?
Have more questions about how to roll out a Safe Harbor plan? Chat with one of our retirement plan experts to learn:
- Safe Harbor rollout timing that follows IRS requirements
- Which Safe Harbor notices need to be sent to employees, and when
- How to make Safe Harbor contributions easier through payroll integration