Employee access to a 401(k) is one of the best and most popular benefits you can offer to improve your business’s ability to recruit and retain top talent. But access to a retirement fund can be difficult for business owners and employees alike. The government (the IRS specifically) wants everyone -- not just the highly compensated -- to be prepared for exiting the workforce come retirement age.
That’s why the IRS has set up tests designed to create an equal playing field for 401(k) access and contributions. They’re called nondiscrimination tests and your business does not want to fail them. Doing so could render expensive corrections, painful administrative processes, and even refunding flubbed contributions.
Enter Safe Harbor 401(k) plans. Safe Harbor 401(k) plans essentially eliminate running afoul of those IRS tests as long as the plan adheres to the following:
Your business agrees to make supplemental contributions to all of your employees’ 401(k) accounts.
By contributing, the IRS offers your business a “safe harbor” from nondiscrimination testing and the penalties of a failed test.
If your business is considering or opting into a Safe Harbor plan, let’s examine how to set up Safe Harbor accounts and deadlines you need to know about.
Safe Harbor 401(k) Guidelines
There are two main requirements for Safe Harbor 401(k) plans: the employer must make contributions to their employees’ 401(k) accounts, and all contributions must vest without a waiting period. In other words, the employer must match employee contributions up to a certain percentage, or, the employee doesn’t contribute, the employer still makes a contribution.
These are the contribution guidelines under the three different plan types:
Basic Matching: The basic Safe Harbor plan matches 100% of employee contributions up to 3% of an employee’s compensation, with a 50% match of the following 2% of their compensation.
Enhanced Matching: The company matches 100% of employee contributions, up to 4% of their compensation.
Non-elective Contribution: The company contributes at least 3% of each employee’s compensation, whether or not employees elective to make contributions themselves.
2019 Safe Harbor Deadlines
If you’re planning on implementing a Safe Harbor 401(k) plan in 2019, the following dates are concerned the very last days to start the process. Keep in mind employees must be notified 30 days before the plan starts.
Dates to remember for new plans:
By or before August 23rd, 2019: Set up the Safe Harbor plan
By September 1st, 2019: 30-day notice sent to employees
October 1st, 2019: Safe Harbor 401(k) plan has started and your business is exempt from nondiscrimination testing for 2019.
Dates to remember for existing plans:
By or before November 30th, 2019: Submit a request for a Safe Harbor provision to your 401(k) plan for the next year.
December 2nd, 2019: 30-day notice sent to employees
January 1st, 2020: Safe Harbor provision is in effect and your business is exempt from nondiscrimination testing.
How to decide if Safe Harbor 401(k) plans are right for your business
If your business is on the fence about Safe Harbor plans, consider the following questions before coming to a decision:
You’re concerned about nondiscrimination testing.
Your business may fail ADP, ACP, or other top-heavy test.
You’re matching employee contributions currently.
Everyone should plan for their retirement, and a Safe Harbor 401(k) plan keeps businesses in compliance while setting up employees for their future. If you’re considering a third-party to handle 401(k) filing and other integrations, reach out to Dominion to see how we can help!