401(k) plans are employer sponsored plans ensuring that all their employees have a dedicated retirement fund. The different types of 401(k) plans include Traditional, Safe Harbor, SIMPLE, Solo, and Roth plans. 401K provider, Ubiquity also has some additional information on exactly what Safe Harbor plans and their benefits are.
When should you use safe harbor 401(k) plan?
401(k) retirement savings require employers to match a certain percentage or dollar-for-dollar amount as bonus while allowing employees to contribute to their own retirement savings account. A safe harbor 401(k) plan is beneficial for your business if:
- Your company, or business is a recent startup or is particularly small
- You are looking for a hassle-free administration
- Your business has a low engagement of employees who are not-highly compensated
- Your business has failed the IRS non-discrimination annual testing in the past
What is a Safe Harbor 401(k) Match?
As per the requirements of safe harbor 401(k) plans, an employer is required to make eligible matching or non-elective contributions to employees. As business owners can choose to contribute to the safe harbor plan by choosing either of the following contributions.
- Basic Matching: Employees should defer funds to receive contributions in the basic matching plan. You are required to match 100% of all employee contributions for the first 3% deferred compensation. Additionally, you have to match 50% of deferred compensation between 3% and 5%.
- Enhanced Matching: Similar to the basic matching plan, employees are required to defer funds in this plan. You should match 100% on at least 4% and up to a maximum of 6% of employee contributions.
- Non-Elective Contributions: You should contribute 3% of the W2 income of the employees if they elect to not make any contributions.
Benefits of having a Safe Harbor 401(k) Match
Unlike traditional plans, matching is mandatory for safe harbor plans. However, it does provide benefits as mentioned below:
- By adding a safe harbor plan to your 401(k), your employees who are highly compensated can maximize their retirement contributions.
- Safe harbor exempts your 401(k) plan from IRS regulated annual compliance testing.
- As you are able to contribute the maximum amount to your 401(k) plan, this plan helps you and your highly compensated employees to optimize your personal retirement savings.
- Your taxable income is reduced as the employer contribution is tax-deductible.
Thus, if you want to retain your employees and provide incentives to the highly compensated employees through generous profit-sharing contributions it is best to select the Safe Harbor 401(k) plan.
What tests can you avoid with Safe Harbor 401(k) Plan
Safe Harbor features automatically pass the IRS non-discrimination tests of ADP and ACP if the company contributions remain within certain parameters. Moreover, if the only contributions you are is making to the Safe Harbor plan are the employee deferrals and the plan’s contributions then this plan is also exempted from top heavy correction requirements. Hence, this plan is best for your small business as you can avoid IRS tests by the safe harbor 401(k) while providing generous profit-sharing contributions to your highly compensated employees.