What is a Safe Harbor 401(k) Plan?
A Safe Harbor 401(k) plan is a type of retirement plan that helps employers meet IRS nondiscrimination requirements. These plans require the employer to contribute to employees’ 401(k) accounts, which can help employees save more for retirement and ensure the plan benefits all employees, not just those with higher salaries.
Why Offer a Safe Harbor 401(k)?
Offering a 401(k) plan makes it easier for your employees to save for retirement. However, the IRS has nondiscrimination tests to ensure the plan benefits everyone fairly. If a 401(k) plan fails these tests, it could mean extra costs and administrative work to correct.
Nondiscrimination Tests
The IRS uses three main tests:
- Actual Deferral Percentage (ADP): Compares the percentage of income contributed to 401(k) by highly compensated employees (HCEs) and other employees.
- Actual Contribution Percentage (ACP): Compares employer matching contributions to HCEs with other employees.
- Top-Heavy Test: Looks at the proportion of plan assets owned by key employees.
How Safe Harbor 401(k) Plans Help
A Safe Harbor 401(k) plan automatically satisfies most of these tests. Employers must make contributions either through matching or non-elective contributions. This can avoid the hassle and cost of failing nondiscrimination tests.
Setting Up a Safe Harbor 401(k) Plan
- Contribution Types: Employers can choose between basic matching, enhanced matching, or non-elective contributions.
- Basic Matching: Traditional: Matches 100% of contributions up to 3% of compensation, plus 50% of the next 2%. QACA: Matches 100% of contributions up to 1% of compensation, plus 50% of the next 5%.
- Enhanced Matching: Must at least meet the basic matching formula.
- Non-Elective Contribution: The company contributes at least 3% of each employee’s compensation regardless of employee contributions.
- Contribution Limits: In 2024, the limit is $23,000 per year for participants under 50, and $30,500 with catch-up contributions for those over 50.
Deadlines for Safe Harbor 401(k) Plans
- New Plans: Must be set up by October 1, 2024, with a 30-day notice to employees by September 1, 2024.
- Existing Plans: Deadlines vary based on the type of Safe Harbor contribution being added.
Employee Notice Requirements
Employees must be notified annually about their rights and obligations under the plan.
Is a Safe Harbor 401(k) Right for Your Company?
Safe Harbor plans are beneficial for companies that:
- Plan to match employee contributions.
- Worry about passing nondiscrimination tests.
- Have low participation rates among non-highly compensated employees (NHCEs).
- Value employee wellbeing.
While Safe Harbor 401(k) plans come with costs, many companies find the benefits outweigh them. They lead to happier employees, tax savings, and fewer worries about failing nondiscrimination tests. If you need assistance setting up a Safe Harbor 401(k), we can help guide you through the process.
