What is a Safe Harbor 401k Match?
Why Do Businesses Benefit from it?
Let’s start off with what is a Safe Harbor 401k Match?
Safe Harbor 401k‘s are retirement plan for small business owners. These owners or employers wish to offer their employees a variety of benefits from a simple and easy-to-use 401K plan. This type of Safe Harbor Plan has become very common among businesses. This plan satisfies nondiscrimination tests* set by the Employee Retirement Income Security Act (ERISA). This act regulates both elective deferrals and employer contributions.
*ERISA provides the Nondescrimination Tests. They prove that in a company there is no discrimination in favor of employees that obtain high incomes.
Is it difficult to enroll in a Safe Harbor 401k Plan?
Enrollment has become much easier and less of a hassle since applications online became available. They are available for people to do from home on their own schedule 24/7. Explanatory videos and guides are available for people planning to enroll, giving them the ease to do it in a short period as well as answer any questions or concerns they may have.
What happens once you set up a Safe Harbor 401k Plan?
Once a sponsor or employer decides on a suitable plan, they have the requirement to achieve certain contributions, vesting*, and notice requirements. Plans are available for those businesses who employ full-time, part-time, and seasonal workers. Employers must be willing to be fund the Safe Harbor contributions on a per-pay-period basis.
*Vesting is the process by which an employee receives unconditional entitlement to share rights or stock incentives in a retirement plan or pension plan.
By obtaining a 401 k Safe Harbor plan, employees can experience a magnitude of benefits. Employees can either electively add a contribution monthly or at any time at their own discretion. Also, participants of the plan may have two outstanding loans per individual that is participating in a designated plan. Furthermore, the employer of a Safe Harbor plan must match contributions or decide on non-elective contributions.
Contribution Methods to a Safe Harbor Plan
This plan has two different ways in which employer can give contributions:
- Employers must match 100% of the contributions made by employees. Various contributions can be made during the first three years, up to 6%.
- An employer must provide a non-elective contribution of 3% to 6% of compensation to all eligible employees.
What Safe Harbor Options are Available?
There are three types of Safe Harbor plans:
- The Standard Safe Harbor Plan: Employees are eligible to participate at their own will by deferring a portion of their pay into the plan. The plan sponsor must agree on giving either a matching contribution to the individuals participating which would defer a portion of their pay or a non-elective contribution to eligible employees of the business.
- QACA (Qualified Automatic Contribution Arrangements) Safe Harbor: Considered as an automatic enrollment plan designed for all eligible employees who are ready to begin deferring at least 3% of their monthly salary into the plan and to annually increase 1% of the deferral percentage for three years. This plan also requires the plan sponsor to give a matching or non-elective contribution.
- The Defined Benefit (DB)/K Safe Harbor: This plan began in 2010 and consists of a combined type of plan that includes defined benefits and a 401K plan with an automatic enrollment feature. With a defined benefit plan, employers are required to make mandatory contributions to eligible employees. With the 401K, every participant in the plan must defer a portion of their pay into the plan and the employer must give a give a matching or non-elective contribution.
*401k Employee Requirements
- An employee must be notified at least 30 to 90 days before the beginning of the plan year. This must be satisfied in order that the plan can become available for the company. The notification must contain Safe Harbor provisions that will be in place with the vesting schedule. These provisions will outline contributions and the conditions when withdrawing from the different types of plans.
- Eligibility begins at 21 years or older and/or having up to 1,000 hours of labor. Starting since the date the employer got to hire the individual.
Benefits of a Safe Harbor plan
Entering a plan can be very beneficial for both the employer and employee. These plans can become convenient over time due to the features available to help employees save for their retirement. Furthermore, these benefits are tax deductible and can be obtain from contributions to the plan.
A huge benefit for the employer or owner when incorporating this plan to their business is that it automatically satisfies some of the nondiscrimination testing, including the Actual Deferral Percentage (ADP), and Actual Contribution Percentage (ACP) from the High-Compensated Employees (HCEs) with the others that form part of the business which are the non-highly compensated employees (NHCEs). The Safe Harbor plan can ease the administration of the business and can also have the use as a tax deductible for the employer. Overall the strengths of this type of plan will be salary deferrals from employees that have high compensations. Employers who need to make or already made contributions end up having more deductions and less hassles with the IRS.
The Safe Harbor plan can include contributions such as profit-sharing, which allows the employer to make a discretionary profit-sharing contribution. Employers usually receive the recommendation to set up and build a strategy for the plan at least three months before the end of the year. This allows a more organized approach of how the plan will be conducted during the year as well as outline contributions, benefits, and requirements that will be need to be satisfied in order to create a successful plan for both the employer and employee.
By understanding the rules and regulations of this plan, a business can have the proper preparation for any future endeavors or failures. Even though the Safe Harbor plan is generally known as the best 401K plan available for small businesses, it can become more expensive than a traditional 401K plan if it is not carefully considered.
Business owners need to weigh the pros and cons before choosing what is best for their company because at the end of the day this decision could possibly be chaotic for employers, employees, and the company. For employees and employers, paying contributions might seem tedious or unreasonable at the time, however; future benefits will outweigh present contributions.