Employers tend to feel like they have to offer a 401(k) retirement plan. However, many organizations, particularly smaller ones, run into trouble with complex rules for discrimination testing. If all of this sounds familiar, you might consider adding a safe harbor feature to your 401(k).
A safe harbor 401(k) plan automatically satisfies the non-discrimination testing rules by satisfying certain contribution, vesting, and notice requirements. Safe harbor 401(k)s differ from traditional 401(k)s in ways that are attractive to both employers and employees.
So, what are the differences between safe harbor and traditional 401(k) plans? First, the non-discrimination testing that is required for traditional 401(k)s is not required for safe harbor 401(k)s. This can be enticing to small employers because it allows for maximum deferrals by and contributions to owners and highly compensated employees without having to worry about actual deferral percentage (ADP) and actual contribution percentage (ACP) testing or correcting testing failures.
Second, and attractive to rank-and-file employees, is that, unlike traditional 401(k)s, safe harbor 401(k)s require plan sponsors to make a safe harbor contribution, in one of the following forms:
Matching contribution. This is 100% of the amount of the participant’s elective deferrals up to 3% of the participant’s compensation, plus 50% of the amount of the participant’s elective deferrals between 3% and 5% of the participant’s compensation.
Non-elective contribution. This must be a minimum of three percent of the employee’s compensation and goes to all eligible participants, whether or not the employees are electing to make deferrals themselves.
Whichever option the employer chooses, the safe harbor employer contribution is immediately 100 percent fully vested. This benefit can encourage employee participation in the plan and help retain current employees and attract new ones.
Consider this a brief introduction to the concept of safe harbor 401(k)s. If you are interested, our firm can help you explore the details further and assess which is the best fit for your organization.