The Small Business Guide to Safe Harbor 401(k)

This article is written by our friends at Guideline

Getting ready to offer a 401(k) to your employees? You’re making a great step to make your employees feel valued. After all, employees with a 401(k) are more likely to be satisfied with their jobs.

But setting up a new 401(k) the right way isn’t exactly a walk in the park. The government wants to make sure that everyone—not just highly compensated employees—gets to participate in a meaningful way. So the IRS has set up a series of what it calls “nondiscrimination” tests that are designed to measure whether a 401(k) plan unduly favors highly compensated employees. You’ll need to pass these tests; failing them can be costly, cause a lot of administrative work, and potentially even lead to refunded 401(k) contributions.

Sounds stressful, right? That’s where a special kind of plan, called a  Safe Harbor 401(k), can reduce your risk and make things easier for you down the road. Here’s how a Safe Harbor 401(k) works and how to set one up.

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How a Safe Harbor 401(k) helps you ace those 401(k) tests

A Safe Harbor 401(k) lets your plan skip right past nondiscrimination testing, thanks to a nifty little quid pro quo:

Your company has to agree to make employer contributions to eligible employees’ 401(k) accounts. In exchange for being more generous and encouraging more employees to participate, the IRS offers you a “safe harbor” from nondiscrimination testing.

Is a Safe Harbor 401(k) right for you?

Good question. In general, Safe Harbor 401(k) plans are a good choice for companies that fit into any of these categories:

  • You’re planning to match employee contributions anyway
  • You don’t want to worry about nondiscrimination testing
  • You’re at risk of failing  ADP, ACP, or top-heavy nondiscrimination tests
  • You have low participation among rank-and-file employees
  • You want to take good care of your employees

For most businesses, the main thing to keep in mind when offering a Safe Harbor 401(k) is that the contributions your company makes can increase your overall payroll by three percent or more. With a Safe Harbor 401(k) plan, though, you have the reassurance that your plan won’t fail, and through retirement savings, you’re moving toward a more prosperous future for everyone in your company.

How to set up your Safe Harbor 401(k)

The main requirement for a Safe Harbor 401(k) is that the employer must make contributions to their employees’ 401(k) savings, and those contributions must vest immediately.

There are three main contribution structures you can choose in your Safe Harbor plan:

  1. Basic Matching: Your company matches 100 percent of each employee’s 401(k) contributions, up to three percent of an employee’s compensation, plus a 50 percent match of the next two percent of their compensation.
  2. Enhanced Matching: Your company matches at least 100 percent of each employee’s 401(k) contributions, up to six percent of their compensation.
  3. Non-elective Contribution: Your company contributes at least three percent of each employee’s compensation to their 401(k), regardless of whether employees make contributions themselves.

Key dates for new plans:

  • By or before August 23, 2019: Set up a Safe Harbor 401(k) plan
  • By September 1, 2019: 30-day notice must be sent to employees
  • October 1, 2019: Safe Harbor 401(k) plan is effective and exempt from nondiscrimination testing for 2019

Key dates for existing plans:

  • By or before November 30, 2019: Request the addition of a Safe Harbor provision to your 401(k) plan for the following year
  • December 2, 2019: 30-day notice must be sent to employees
  • January 1, 2020: Safe Harbor provision takes effect and exempts the plan from nondiscrimination testing

With a Safe arbor 401(k) plan, you can get your retirement savings program up and running quickly to help your team save even more for their future.

For even more information on Safe Harbor 401(k) plans, check out Guideline’s full guide here.

Disclosure:
The information provided herein is general in nature and is for informational purposes only. It should not be used as a substitute for specific tax, legal and/or financial advice that considers all relevant facts and circumstances. You are advised to consult a qualified financial adviser or tax professional before relying on the information provided herein.

About Guideline

Guideline is an an all-inclusive 401(k) plan for growing businesses that makes it easy for employers to set up a retirement plan and even easier for employees to enroll and save. Guideline’s software automates the heavy lifting involved in offering a 401(k) plan—plan administration, record keeping, compliance testing, reporting and disclosures, and investment management—so employers can focus on what’s most important: their business and its employees. Guideline is the only 401(k) provider that doesn’t charge participants any fees on investments, regardless of the value of their retirement account balance. And for employers, Guideline charges a transparent monthly fee structure, in contrast to the asset-based fee model predominant in the industry.