Let’s get this out of the way – we, at True North Retirement Services, really like Safe Harbor 401(k) plans.
The reasons should resonate with anyone looking to offer a 401(k) plan. We like them because they are very desirable from both an employer and an employee standpoint. Classic win-win.
For employees, they are seen as one of the better types of 401(k) plans, so a Safe Harbor 401(k) is more likely to better contribute to employee attraction and retention (which is part of the reason you have a 401(k) plan in the first place, right?). Employees tend to save more for retirement, and there’s no downside to that.
For employers, a Safe Harbor 401(k) automatically passes the IRS’s non-discriminatory testing. It also makes the contribution levels uniform, so keeping tabs on contributions by HCE (Highly Compensated Employees) and NHCE (Non-Highly Compensated Employees) becomes a non-issue. This ease of use makes it very simple from an administrative standpoint and can save a lot of money simply because there’s very little paperwork and checking (or double checking).
So let’s go over the three most common questions regarding Safe Harbor 401(k) plans:
Question 1: Just What IS a Safe Harbor 401(k) plan?
A Safe Harbor 401(k) plan is a 401(k) with a defined contribution level for employers. Job title, seniority, etc. do not factor into contribution levels, making it very simple.
A company must meet ONE of the following three minimum requirements to be considered a Safe Harbor 401(k):
- Elective Contribution with Enhanced Match: This is where the employer matches 100% of all employee 401(k) contributions, up to 4% of their compensation.
- Elective Contribution with Basic Match: This is where an employer matches 100% of all employee 401(k) contributions, up to 3% of their compensation, then also provides a 50% match of the next 2% of their compensation (note: if you are doing the math and say “hey, that’s still essentially 4%”, you’d be correct. More on this later.)
- Non-elective Contribution: The company contributes 3% of each employee’s compensation whether the employee contributes or not.
Note these are minimum requirements. A company can contribute a higher percentage (up to 6%) if they wish and still be considered Safe Harbor. The key is the contribution needs to be uniform. A company cannot contribute more for certain employees.
In addition, it should be noted that all employees in a Safe Harbor 401(k) are immediately vested when they become plan eligible. In other types of 401(k) plans, the company can have varying vesting timelines, but Safe Harbor does away with that. Again, employees like this feature. It even cuts down on paperwork a little more too.
Question 2: Which of the Three Types Is Best For Our Company?
There is no concrete answer here, but we will tell you that the enhanced 4% match (option one) is far and away the most popular. It allows a company to make a healthy contribution (which employees like a lot) and also encourages the employees to contribute to their own retirement.
Note: Remember earlier where we showed that option 2 was still 4%? The “enhanced” option simplified it. That’s why more companies prefer it – it’s easier to understand and figure out contributions. And it works out to the same for an employer unless an employee contributes 5%.
Assuming the goal is for a solid retirement for a company’s employees, it’s easy to see why the enhanced option is the most desirable. A company may contribute more across the board, but the 4% minimum is pretty healthy, so most companies stay right there, keeping everyone happy with the easy, robust Safe Harbor 401(k).
The third option could be attractive, but it does not encourage employees to save. We know that many employees will not contribute if their employer is making a contribution and they don’t have to. Again, assuming the goal is a solid retirement for employees, it’s better to have both employee and employer contributing.
Question 3: How Can We Get Started? And Are There Any Deadlines?
To get started, simply call True North Retirement Services. We’ll take it from there and can explain everything in greater detail, so you can choose the best option for you.
Now let’s talk about deadlines because there are a few. Here are the basics:
The deadline to start a new Safe Harbor 401(k) for the current year is October 1. That’s because a new Safe Harbor 401(k) has to be in effect for at least three months.
You can change an existing Safe Harbor 401(k) (for example, switching from elective to nonelective) anytime before Dec 1. Dec 1 is the deadline to notify employees of any changes.
If you have an existing 401(k) and want to change it to a Safe Harbor 401(k), you need to notify your provider and employees by Dec 1 as well. The Safe Harbor plan will take effect Jan 1 of the following year.
See, that wasn’t too hard, right? Safe Harbor 401(k)’s are pretty easy to understand and even easier to implement. Just be mindful of the dates above, and you and your employees can enjoy the benefits of a Safe Harbor 401(k).
If you are interested in speaking about Safe Harbor 401(k) plan, or any other retirement plan, feel free to call True North Retirement Services at (801) 274-1768 or continue browsing our site.