The Safe Harbor 401(k) plan is a way for employers to bypass IRS non-discrimination tests. Employers can essentially exempt themselves from red tape by making specific 401(k) contributions on behalf of employees. You can think of it as giving eligible employees an immediate pay raise or company match in exchange for fewer compliance headaches.
Safe harbor plans exist for employers to avoid annual IRS nondiscrimination tests. The IRS uses these tests to determine whether a company’s 401(k) plan didn’t discriminate in favor of highly compensated employees (the highest earners in the company). When the IRS set up the rules for 401(k) plans, it wanted to make sure that the program helped everyone save money for retirement. The government didn’t want a situation where bosses were able to shelter lots of money from taxes while ordinary employees received no benefits at all. This policy worked great for almost everyone, unless you were a small business owner trying to keep costs low.
The IRS nondiscrimination tests (the ADP and ACP) compare the contributions or savings rates of one group of employees to the other. The IRS runs the test to determine whether employees across the company, regardless of how much they make, are saving at roughly equal rates or total dollar amounts. What the IRS doesn't want to see are highly compensated employees (HCEs) 401(k) contributions making up more than 70% of the total plan assets.
The tough part about a safe harbor plan is it’s expensive. Often the cost of safe harbor 401(k) contributions can mean not offering a 401(k) at all.
Because of this a lot of business owners decide not to offer a retirement plan at all, rather than be locked into something that is not affordable. Unfortunately, IRS policies don’t seem to take into account the ever-changing financial state that small businesses are in as they establish themselves. Employees want to work for a company that offers a retirement plan. Owners need to save for their own retirements.
The alternative: Design a plan that works for your workers. There are ways other than a safe harbor 401(k) plan to meet the IRS nondiscrimination requirements. Your alternative is to get a 401(k) plan that is very good at getting people to use the plan, and helps people save at high rates. It’s cheaper for you, and good for your employees. The keys to getting high participation and savings rates means getting a 401(k) plan built with lots of automation that’s accessible on mobile devices. Again, this will help give you what you need to skip safe harbor contributions and still pass nondiscrimination testing. And it will give your employees a benefit that works for their financial futures.
As you can see, offering a safe harbor plan is really expensive! Before you take on the additional costs, find out if an alternative plan design will work for your company. ForUsAll’s expertise and technology platform are uniquely suited to help clients pass IRS nondiscrimination tests without safe harbor by boosting participation and savings rates. On average we help clients realize 89% participation and a 8% savings rate across our book of business. Talk to us today about your safe harbor plan alternative, and see if you can save thousands!
Disclaimer: This calculator serves to estimate the employer cost of implementing a safe harbor plan, but is no guarantee of exact price or expenditure. It calculates employer cost for non-elective plans assuming 100% employee eligibility and a flat 3% employer contribution--the minimum non-elective contribution percentage required to achieve safe harbor status. Cost estimates for matching plans similarly reflect the minimum employer contribution necessary to achieve safe harbor status, calculated assuming a 100% employer match on the first 3% an employee defers, plus 50% of the next 2% an employee defers. The match calculation also assumes that 100% of participating employees will defer at least 3% to take advantage of the match.
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