A 401(k) Retirement Savings Plan with a Safe Harbor election may be something for almost any type of business to consider. While the plan design requires an employer contribution of a specific amount which is valuable to current and future employees, it also has a unique set of benefits for adopting employers, unmatched by any other plan type. To see if a Safe Harbor plan is right for your business, read the top reasons you should consider when evaluating your plan options.
1. Avoid Annual IRS Non-Discrimination Testing
One major benefit to opening a Safe Harbor plan is being able to skip nondiscrimination testing with the Internal Revenue Service (IRS) each year.
Non-Discrimination testing looks at the contribution rates of Highly Compensated Employees (HCE’s) vs. Non-Highly Compensated Employees (NHCE’s). NHCE’s may elect to contribute almost any percentage of their compensation, up to the annual maximum dollar limit. That group’s Average Deferral Percentage (ADP) then determines how much the HCE’s can contribute of their income. The passing rate for the HCE’s is approximately 2% greater than the ADP of the NHCE’s. HCE’s who contribute more than the passing rate are issued a refund of excess contributions down to the passing rate. This means that HCE’s do not automatically have the option of making the full deferral contributions when participation rates are low from the NHCE’s. A Safe Harbor plan design eliminates that restriction which then provides the HCE’s the same opportunity to contribute as much as the NHCE’s.
2. Tax Credits for New Plans
Companies that have not previously sponsored a retirement savings plan may be eligible for tax credits under the SECURE Act. The Act allows small companies to earn a series of credits that can be used to offset the administration expenses, employee education, and annual maintenance of implementing a plan.
The benefit is determined by the number of eligible Non-Highly Compensated Employees and is available for the first three years the plan is implemented. There is a tax credit of $250 per eligible NHCE, with a minimum tax credit of $500 per year. If a company has 20 or more eligible NHCE’s, the credit can be up to the maximum of $5,000 per year. This is a great tax break for small companies with less than 100 employees and can make a big difference in the amount owed to the IRS each year. Please note, these credits are only available to companies who have not previously sponsored any type of retirement savings plan such as 401(k) and/or Simple IRA.
3. Flexible Plan Options- Here are a few examples:
- Basic Safe Harbor Match: The company makes a matching contribution to employees who elect to participate. The match is 100% on the first 3%, plus 50% on the next 2% of pay deferred each payroll period. This equates to a company match of 4% of pay for employees who contribute 5% or more of their pay.
- Enhanced Safe Harbor Match: The company makes a matching contribution to employees who elect to participate. The match is 100% on the first 4% of pay deferred each payroll period. The company may elect to match greater than 4%, but the maximum would be 6%.
- Nonelective Safe Harbor Contribution: With this plan design, the company contributes to all eligible employees. The contribution is 3% of each eligible employee’s compensation, regardless if an employee elects to make their own contributions.
These Safe Harbor company contributions are all required to be fully vested to all employees, at all times.
4. Talent Retention and Attraction
The job market can be competitive for both the employee and employer alike. In today’s market, salary isn’t necessarily enough to get someone on your team. Benefits packages may be the deciding factor between an interviewee choosing your company over another. Offering valuable benefits like a Safe Harbor plan can help seal the deal.
Small adjustments to your benefits package can go a long way in today’s job market and employees recognize the level of commitment the company has in their future.
If you have been thinking about offering a retirement plan to your employees, A 401(k) with a Safe Harbor election may certainly be something to consider. If you have an existing plan that is not a Safe Harbor plan design, you may elect a Safe Harbor plan as of 1/1 of the next calendar year, but there are specific dates that notices need to be provided to meet a 1/1 effective.
We would be glad to discuss these details and features with you. Contact us to learn more about the 401(k) plan options available for you and your business.