A Safe Harbor 401(k) is designed for companies looking to attract top talent or maximize tax savings for owners. Best of all, it reduces administrative work.
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A safe harbor plan is a type of 401(k) where employers commit to a minimum employer contributions in exchange for automatically passing key IRS non-discrimination tests. With a safe harbor plan, employers can choose to offer a match (typically 4%) or non-elective contribution of 3%.
Basically, you have three options for safe harbor contributions: (1) Basic match; (2) Enhanced match; or (3) Non-elective. With the basic match, the company matches up to 4% of eligible employee pay in tiers. You match 100% on the first 3% employees contribute, plus 50% match on the next 2% they defer. For example, if an employee earns $50,000 and saves 4% of their pay ($2,000), you will first match 100% of the first 3% they saved ($50,000 x 3% x 100%=$1,500) plus 50% on the next 1% they save ($50k x 1% x 50%=$250). The total match would be $1,750 ($1800 + $300). Great for Companies on a budget that expect low participation. With an enhanced match, the company matches at least 100% of the first 4% that employees contribute. You can increase your match rate as high as you’d like (e.g., 200% of employee contributions) but you can’t require employees to save more than 6% of their pay to get the full match. Enhanced matches are great for companies looking to attract and retain top talent. With a nonelective Safe Harbor, the company contributes 3% or more of each employee’s pay, regardless of whether or not the employee saves in the plan. For example, if an employee makes $70,000, you will have to contribute $2,100 even if they don’t save anything in the plan. A non-elective is great for companies on a budget that expect high participation or owners that want to maximize tax-savings by adding a profit-sharing plan.
First, Secure Act 2.0 provides valuable tax credits which may cover all of the admin fees and up to $1k per employee that receives a contribution. Second, you can require employees to work at the company for a year before they are eligible for the company contribution. Lastly, consider the non-elective - which is cheaper than the basic match when participation is above 75%.
The basic match, enhanced match and nonelective contributions all must vest immediately. That said, you can make additional contributions (profit-sharing or match) with vesting schedules as long as 6 years.
Safe harbor contributions allow employers to automatically pass the actual deferral percentage test (ADP test) and the actual contribution percentage test (ACP test) if only safe harbor contributions are made. You may also automatically meet the top-heavy requirements.
If you are starting a new safe harbor plan with a match, employees need to be able to contribute at least 3 months - so set up the plan in September to be safe so that it is live by 10/1. If you are starting a non-elective safe harbor you have until December 1 to start the plan. However, if you are modifying an existing plan, you must amend your existing plan and send notices by 12/1.