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Safe Harbor 401(k) Plan: What Is It? Is it For You?

November 24, 2020 · 5 minute read

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Safe Harbor 401(k) Plan: What Is It? Is it For You?

Safe harbor 401k plans enable companies—usually smaller ones—to sidestep the regulatory oversight that comes with traditional 401k plans. A perk used to attract top talent, safe harbor plans are a way for highly compensated employees to max out their 401k contributions.

With traditional 401k plans, contributions from highly compensated employees—including business owners—can’t comprise more than 2% of the average of all other employee contributions. With a safe harbor 401k plan, there are no such limits.

If you’re wondering about 401k safe harbor plans, it may be because you’re a business owner trying to decide what plan to offer employees, or it may be because your current or prospective employer offers one. Read on for more about what safe harbor 401k plans are and why companies use them, along with the benefits, drawbacks and relevant deadlines.

Safe Harbor 401k Plans Defined

A 401k safe harbor plan is a traditional 401k plan with an incentivizing twist.

With typical 401k retirement plans, any employee, regardless of title, salary, or even years spent at the company, receives the same plan contributions as any other employee or manager at the company. Annual non-discrimination regulatory testing ensures that companies who provide 401k plans to employees treat all employees equally in terms of plan contributions.

A safe harbor 401k allows companies to steer more robust 401k plan contributions to high-level employees and managers, depending on their salaries. Safe harbor 401ks bypass annual non-discrimination testing by adding a mandatory employer contribution at a minimum contribution level.

Having a safe harbor 401k plan frees company decision-makers to shower certain staffers with more plan contribution cash and immediate vesting, both of which could get and keep highly-valued employees in the fold.

Safe Harbor 401k Rules

With a safe harbor 401k, the company contributes to employees’ retirement accounts in one of three ways:

•   Non-elective: The company contributes the equivalent of 3% of each team member’s annual salary to a company 401k plan, regardless of whether the employee contributes.
•   Basic: The company offers 100% matching for the first 3% of an employee’s 401k plan contributions, plus a 50% match for the following 2% of an employee’s contributions.
•   Enhanced: The company offers a 100% company match for all employee 401k contributions, up to 4% of a staffer’s annual salary.

Regulators may also take a close look at a company’s cash flow and corporate finance strategy, and how it will result in a fair and equitable disbursement of funds to the company’s 401k safe harbor plan, and to its employees.

Once that hurdle is cleared, a company owner can reserve the maximum $19,500 (in 2020) for their own plan contribution, and also boost contribution payments to valued team members up to an individual profit-sharing maximum amount of $56,000.

“Regular” (non-favored) employees are allowed the same maximum contribution limit of $19,500, plus anyone over age 50 can contribute an extra “catch-up” amount of $6,500. Those are the same maximum contribution ceilings as regular 401k plans.

Benefits of Offering a Safe Harbor 401k Plan

By creating a safe harbor 401k plan, a business owner can potentially attract and maintain valued employees with higher retirement plan contributions, and also optimize retirement plan contribution amounts for ownership, ensuring more money for long-term retirement savings.

Plus, a safe harbor 401k plan can also help business owners save money on the compliance end of the commercial spectrum. By avoiding the preparation costs of preparing for a nondiscrimination test (and the staff hours and training that goes with it), companies save on regulatory costs.

There are a number of additional upsides to offering a safe harbor 401k retirement plan.

•   If a company owner, or high-level managers, historically haven’t stowed enough money away in a company retirement plan, a safe harbor 401k plan can help them pay “catch up” fast.
•   If a company has a steady and robust revenue stream, and is managed efficiently, company owners may feel comfortable “spreading the wealth” with not only high-profile talent, but rank-and-file employees, too.
•   If a company is seeing weak contribution activity from its rank-and-file employees, it may feel more comfortable going the safe harbor route and at least guaranteeing minimum 401k contributions to employees, while rewarding higher-value employees with more lucrative 401k plan contributions.

Potential Drawbacks of a Safe Harbor 401k Plan

No doubt, safe harbor 401k plans have their downsides, too.

The matching contribution requirements can add up to a hefty expense, depending on employee salaries. And because employees are vested immediately, there’s no incentive to stay with the company for a certain period of time.

If a company introduces a safe harbor 401k plan, it must commit to it for one calendar year, no matter how the plan is performing internally. Even after a year, 401k plan providers (which administer and manage the retirement plans) usually charge a termination fee if a company decides to pull the plug on its safe harbor plan after one year.

Filing Deadlines for a Safe Harbor 401k Plan

Companies that opt for a safe harbor 401k plan have to adhere to strict compliance filing deadlines. These are the dates worth knowing.

October 1: That’s the deadline for filing for a safe harbor 401k for the current calendar year. This deadline meets the government criteria of a company needing to have a safe harbor 401k in operation for at least three months in a 12 month period, for the first year operating a safe harbor plan.

November 1: For companies with a safe harbor plan already in place, November 1st represents the last date a business can change the structure of a safe harbor plan. Regulators stipulate the November 1 deadline date for plan changes so notices can be transmitted to employees by December 1, giving them time to prepare for the next calendar year.

December 1: By this date, all companies—whether they’re rolling out a brand new safe harbor plan or are administering an existing one—must issue a formal notice to employees that a safe harbor 401k will be offered to company staffers.

January 1: The date that all safe harbor 401k plans are activated.

For companies that currently have no 401k plan at all, they can roll out either a traditional 401k plan or a safe harbor 401k plan at any point in the year, for that calendar year.

The Takeaway

Smaller companies that don’t want the regulatory obligations of a traditional 401k plan and want to prioritize talent acquisition and retention, may choose to consider safe harbor 401k plans.

These plans allow an employer to bestow extra retirement benefits on high-value employees, making an overall compensation package more desirable. But it’s important for a business owner to weigh the pros and cons of a safe harbor 401k plan, because in some cases it can be quite expensive for a company to maintain.

For business owners who aren’t sure what retirement plan is right for their company and their employees, it can be helpful to research other employer-sponsored plans, including SIMPLE (Savings Incentive Match Plan for Employees) IRAs (Individual Retirement Account) or SEP IRAs.

Planning for retirement? Learn how working with a financial planner can help you reach your goals.



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