What Is a Safe Harbor 401(k) Plan?

Failing 401(k) compliance testing can have costly consequences. If you’re looking to protect business interests while also helping your employees save for retirement, a safe harbor plan can be a smart retirement plan option.

Choosing a safe harbor 401(k) plan from the start allows your organization to skip certain annual nondiscrimination, or compliance, tests.

ePlan Services makes safe harbor enrollment and management easy. Read on for more information about how the safe harbor plan works.

Types of Safe Harbor Plans

A safe harbor plan is put in place to exempt business owners from otherwise mandatory compliance testing.

There are two types of Safe Harbor Plans:

• Traditional: In order to be considered a traditional safe harbor plan, employers must make contributions to employee accounts. These contributions can be in the form of a match or a non-elective contribution. Additionally, any contributed funds are immediately vested.
• Auto-enrollment: This plan type is known as Qualified Automatic Contribution Arrangement (QACA). With this option, employees are automatically enrolled in a safe harbor plan unless they opt out.

Like the traditional option, these safe harbor plans are exempt from compliance tests that compare the highly compensated employees to the non-highly compensated employees.

An employee must complete two years of service, or approximately 2,000 hours, before their employer contributions can be fully vested. However, QACA can also have 100% immediate vesting.

Types of employer contributions in a safe harbor 401(k) Plan

For business owners to bypass compliance testing and fall under the umbrella of a safe harbor plan, they must make required contributions to plan participant accounts.

• Basic Safe Harbor Match: The employer matches 100% of the first 3% of each employee’s contribution and 50% of the next 2%. Employees must contribute to their 401(k) plan to receive a match.
•  Non-Elective Safe Harbor Match: Eligible employees are required to receive a minimum employer contribution of 3% of their salary. Highly compensated employees can be excluded from receiving a non-elective contribution.
• Enhanced Safe Harbor Match: This can be no less than the basic match formula. The employer matches 100% of the first 4% of each employee’s contribution. Their tier options include 100% up to 4%, 5%, and 6%. Much like a basic safe harbor match, employees need to defer money to their 401(k) to be eligible for the match.

Safe harbor notice requirements

Employers sponsoring basic match safe harbor 401(k) plans must meet certain notice requirements. Employers meet these requirements when they provide each eligible employee with a written statement of their rights and obligations under the plan and the notice satisfies the timing and content requirements. Notice is provided to each eligible employee at least 30 days and not more than 90 days before the beginning of each plan year.

These are some of the details required in the notice:

• Indicates the type of safe harbor method in use
• Details how eligible employees make elections
• Details the plan that will receive the contributions
• Withdrawal and vesting provisions
• Information regarding who employees can contact to obtain additional information

ePlan Services simplifies the notice process by providing clients with safe harbor notices that meet all regulatory requirements. For more information about this, speak with one of our retirement sales experts.

Pros and cons of a safe harbor 401(k) plan

The benefits of a safe harbor 401(k) plan generally outweigh the only potential con, which is that employers are required to provide contributions to employee accounts. While this may concern some business owners, it’s necessary to consider all the benefits including:

• Avoiding compliance testing: These plans are often more attractive for business owners because they are not subject to several compliance tests. If you choose not to adopt a Safe Harbor plan for your business and you fail compliance testing, you could face penalties. Owners may even need to redistribute money from their own 401(k) accounts to correct the imbalance.

• Attracting and retaining talent: Safe harbor plans can be attractive incentives for employees because participant is eligible to receive an employer contribution. A traditional Safe Harbor Plan allows contributions from the employer to be immediately 100% vested. These employer contributions, in addition to salary contributions, help pave the way for a smooth retirement savings process for your employees.
• Tax benefits: With safe harbor 401(k) plans, an employer may claim a $500 tax credit in the first three years.

Conclusion

Offering top-quality retirement options for employees is made simple with a safe harbor 401(k). Not only will employees have the ability to contribute a percentage of their salary towards their retirement, but they’ll also receive employer contributions as well.

A safe harbor plan can help to boost employee trust and loyalty to the company. Ready to get started? ePlan’s team of retirement sales experts is here to make setup and execution simple.

For information on which safe harbor 401(k) Plan is right for you, reach out to the team at ePlan Services today.

This content is for educational purposes only, is not intended to provide specific legal or financial advice, and should not be used as a substitute for the legal advice of a qualified attorney or financial professional. The information may not reflect the most current legal developments, may be changed without notice and is not guaranteed to be complete, correct, or up to date.