A Quick Guide To A Safe Harbor 401k Match

Safe Harbor

The Safe Harbor 401K plan is one of the best retirement savings options available for small businesses. This plan allows business owners and their employees to maximize their retirement contributions, free of the worry and hassle of IRS non-discrimination testing. Even with all its advantages, you will still need to choose the best matching option to ensure you and your employees get the most out of this provision. Read on to learn more about what a Safe Harbor match entails.

What Are the Safe Harbor 401K Matching Options?

The 401K is a unique retirement plan, often sponsored by employers to enhance employee recruitment and retention. One of these plans’ key characteristics is that they allow workers to save up funds for their future by contributing to their own accounts. The employer then matches a portion of the funds that the worker has allocated to their 401K, enhancing the amount that they have saved for post-retirement life.

Not all 401K plans require matching, which is why the Safe Harbor plan is highly unique. For all eligible employees, whether they choose to participate or not, the employer is required to provide a minimum percent match, typically between 3-6% across all the alternatives. You can choose between the following three matching options with a Safe Harbor provision:

  • Basic: Business owners are required to match 100% of employee contributions for the first 3% of deferred funds.
  • Enhanced: Business owners must match 100% of 4-6% of employee contributions.
  • Non-elective: For all eligible employees that do not intend to participate in their 401K plan, business owners are still obligated to contribute a minimum of 3% of their gross salary.

The Advantages of Choosing a Safe Harbor Plan for Your Business

As you can see, these options are incredible for providing the maximum flexibility to both business owners and their employees regarding retirement plan contributions. Further, you don’t have to stress about potentially failing non-discrimination testing due to HCEs (highly-compensated employees) taking advantage of these matching and contribution options. You will remain in compliance with IRS (Internal Revenue Service) standards, all while reaping these benefits.

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Namely, you can enjoy legally bypassing the following tests:

  • Actual Deferred Percentage (ADP): With the Safe Harbor plan, employees who either earn $125,000 or own at least 5% of the company can contribute to their 401K at comparable rates to non-HCEs. Typically, the ADP test would negatively impact businesses with such a contribution structure. Yet, with the Safe Harbor provision, you just need a return of HCEs’ excess or a method of bringing other employee contributions to a passing level (within 2% of HCE contributions).
  • Actual Contribution Percentage (ACP): This is essentially the same as the ADP. However, the focus lies on the employer’s contributions. Your contributions should not be unusually high for HCEs relative to other employees (ratio for HCE : non-HCE should not exceed 125%).
  • Top-Heavy: “Key employees” are not allowed to hold any more than 60% of the plan’s total balance. To pass, you must make a minimum of 3% contributions to non-key employees.

You’ll also have the advantage of avoiding pesky IRS penalties like 10% fees for excess contributions and potential plan rejections. To learn more about how you can implement a Safe Harbor provision into your plan, get in touch with a 401K plan provider.