What is Safe Harbor 401(k) and Does My Business Need a Safe Harbor Plan?

There are many different options for your company’s 401(k) Plan and it can be overwhelming trying to decide on one. One option that you may have seen in your research is a Safe Harbor 401(k) Plan.  A Safe Harbor Plan can be a great option for your business for a variety of reasons. The more you learn about how a 401(k) Plan works - particularly the annual Nondiscrimination Testing – the more you will understand why Safe Harbor is the ideal choice for most small & medium-sized businesses. This article will help you to better understand this type of 401(k) for you to make an informed decision.

A company of any size can utilize the Safe Harbor feature. What makes Safe Harbor 401(k) plans so great is that the plan will automatically pass the annual Top Heavy tests and the ADP/ACP tests. This allows the owners & officers to maximize their contributions to the plan without worrying about receiving any refunds.  In order to be a Safe Harbor Plan, the business must choose between using a Safe Harbor Match or a Safe Harbor Non-Elective (Profit Sharing) Contribution. The required match you would provide would be a contribution 100% on the first 3% of salary deferred of compensation to anyone actively participating in the Plan; with the Non-Elective Contribution you provide 3% to anyone eligible for the Plan. Either of these contributions can be a small price to pay to avoid dealing with ADP refunds for you or the high-ranking employees in your company.

The reason that Safe Harbor can be such a great option is that it allows all employees, including owners, officers, and other Highly-Compensated Employees (HCE) to save up to $24,000 without them having to worry about issues like a “Refund of Deferrals”. This happens because at the end of the year, there can be 401(k) test failures. You should know that there are quite a few complicated 401(k) nondiscrimination tests that take place each year, the results of which are often undesirable and unexpected.

There are a few other things that you should know about Safe Harbor: 1) If you want to create a Safe Harbor plan, you must do so by October 1 of a given year; after then you will have to wait until the next calendar year (and miss out on huge tax savings). 2) Employees who are eligible to make elective deferrals must be eligible for the Safe Harbor contribution - Employers will not be able to impose such restrictions as “last day of service” or any type of hours requirement for these contributions. 3) Safe Harbor contributions 100% vested immediately.

A Safe Harbor 401(k) Plan can be a great option for any business but you may find this an especially great option if you are a small business. You want to ensure that you and your employees have the best 401(k) that you can offer them because everyone wants financial stability when they retire.

Wellington Retirement Solutions, Inc. can help you determine what type of 401(k) Plan is ideal for your business. Even if you already have a 401(k) Plan, allow us to review your Plan provisions for peace of mind to know that the design of your 401(k) Plan meets your goals & objectives.

 - Robert J. Alexander

Mr. Alexander is a Pension Consultant with Wellington Retirement Solutions, Inc. and has over 10 years of experience in the industry. Wellington Retirement Solutions, Inc. is committed to providing personal service excellence. If you have any questions regarding the information in this article then please reach out to one of our specialists at (888) 934-4015.

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