Small and large companies alike may choose to adopt a Safe Harbor provision as part of their 401(k) plan design if they’re at risk of failing annual non-discrimination testing, but there are many factors at play when deciding if it’s the right fit for your business and employees. Consider these six common Safe Harbor questions as you weigh potential benefits, your eligible employees, and your matching contribution options with a Safe Harbor 401(k) plan design.
What Are the Potential Benefits of a Safe Harbor Plan Design?
Safe Harbor 401(k) plans are designed to encourage plan sponsors to contribute to their employees’ 401(k) accounts in an effort to boost employee participation and outcomes while saving for retirement. Safe Harbor also offers businesses the chance to avoid top-heavy rules and nondiscrimination tests—which we’ll cover in more detail in a minute.
Essentially, Safe Harbor provisions allow owners and other highly compensated employees to contribute the maximum annual deferral amount into their own retirement savings account, provided the company is meeting the Safe Harbor contribution criteria.
What Are Nondiscrimination Tests?
The ADP and ACP nondiscrimination tests review contributions made to your company’s 401(k) plan to ensure that the average employee’s contribution is proportional to that of owners and managers.
Because the U.S. government offers employers tax benefits for sponsoring a 401(k) plan, the plans must pass annual nondiscrimination testing to ensure that owners and other highly compensated employees do not have unfair advantages related to the plan over other employees.
It's important to remember that even though Safe Harbor plan provisions will exempt your plan from having to pass certain nondiscrimination tests, your plan will still be subject to annual audits. Annual audits on a plan's financial statements are required for any plan subject to the provisions of ERISA, unless the plan had less than 100 participants at the start of the plan year or the plan had between 80-120 participants at the beginning of the plan year and a Form 5500-SF was filed the prior year.
Who is Considered an Owner or Highly Compensated Employee?
According to the IRS, a highly compensated employee (HCE) for 401(k) plan purposes is one who earns at least $125,000 a year or owns more than five percent of the company. These key employees may not be allowed to maximize their contributions in a traditional 401(k) plan if the average employee is not consistently contributing to their 401(k) plan.
According to the Internal Revenue Code Section 318, family members of highly compensated employees may also be deemed an HCE and may face the same 401(k) contribution restrictions.
What Contributions Do I Need to Make to a Safe Harbor 401(k) Plan?
In order to satisfy the criteria of a Safe Harbor 401(k), you will need to allocate contributions to employee retirement savings in one of three ways. Each of the three allocation options require a contribution to employees’ retirement plans. Your contributions to a Safe Harbor 401(k), whether in the form of a match or a non-elective contribution, are automatically 100 percent vested.
- Basic Match: With a basic match option, you would need to match one hundred percent of the first three percent of an employee’s deferrals, plus fifty percent of the next two percent of deferrals.
- Enhanced Match: With an enhanced Safe Harbor match, you would be required to match one hundred percent of at least the first four percent of employee contributions.
- Non-Elective Contribution: The non-elective option requires you to contribute at least three percent of compensation to all eligible employees, regardless of their contribution rate or percentage.
If interested, you may choose to contribute more than the minimum required percentages regardless of allocation option. The plan will still qualify as Safe Harbor.
Does a Safe Harbor Provision Require Proof of a Predictable Revenue Stream?
Your business may have difficulty meeting the matching funds criteria for a Safe Harbor plan without consistent revenue. However, Safe Harbor 401(k) plans do not require proof of a predictable revenue stream.
Because of this, a Safe Harbor 401(k) may be more suitable for companies with a generally predictable revenue who will be able to match required funds on a consistent basis.
Is there a Deadline to Amend or Set Up a Safe Harbor Plan?
There are four important annual deadlines when it comes to the start-up and continuation of a qualifying Safe Harbor 401(k) plan.
October 1st: A Safe Harbor plan must be active for at least three months of its first year in operation. That means that the deadline for the launch of a new Safe Harbor 401(k) plan for the current calendar year is the first of October.
November 1st: Employee notices for the start, continuation, or amendment a Safe Harbor 401(k) plan must be distributed by the first of December. Therefore, it is best to notify your provider of any changes to your 401(k) plan design before November 1st.
If you have an existing Safe Harbor 401(k) plan design and are changing your contribution type, you will need to have the process completed in time to notify employees by the first of December.
If you have a traditional 401(k) to which you would like to add a Safe Harbor provision for the following calendar year, you are required to have notified your provider and eligible employees by the December 1st deadline.
December 1st: This is the date by which all Safe Harbor plans, new and existing, must have provided notice to eligible employees. Employees must have notice at least 30 days before the end of the year.
January 1st: Transitioned Safe Harbor plans and any amendments to an existing Safe Harbor 401(k) take effect on the first of January. Traditional 401(k) plans can’t add Safe Harbor mid-year—but new 401(k) plans, whether or not they are Safe Harbor, can be established at any time.
Learn More About Retirement Planning & Safe Harbor 401(k)
We know this sounds complex, but through our 401(k) payroll provider, PAi, you have access to their knowledgeable retirement sales team. They can walk you through your options for Safe Harbor plan design and help you decide if it is the right path for you.
Since PAi is integrated with your BenefitMall payroll you can take advantage of the ease of use when submitting employee contributions. We have a 360 integration in place with PAi which means once you upload your employee’s census data, PAi handles the rest. They will automatically send any changes your employees make to their contributions back to BenefitMall to update in our payroll system, saving you time so you can get back to what you do best – running your business.
To learn more about Safe Harbor and how it can help accommodate plan sponsors who may be at risk of failing non-discrimination tests, or if you want to learn more about other 401k plans, contact us now.