A safe harbor 401(k) plan is a type of retirement savings plan that offers benefits for employers and employees alike.
Here are the advantages of adding a safe harbor provision to your 401(k) plan.
1. Automatically pass burdensome nondiscrimination testing
One of the biggest benefits of a safe harbor plan for employers is that they are deemed to pass certain required annual nondiscrimination testing, including the Actual Deferral Percentage (ADP) and, in some cases, the Actual Contribution Percentage (ACP) and Top Heavy tests, if certain conditions are met. These tests are designed to ensure plan benefits are fair for all participants and don’t discriminate in favor of business owners and highly paid employees.
The consequences of failing these tests can include costly corrections. You can learn more about the implications of nondiscrimination testing here.
2. Encourage participation and reward employees for saving
To meet safe harbor standards and receive the benefits of deemed passing nondiscrimination testing, employers are required to make contributions to their employees’ accounts. These contributions serve as an incentive to encourage more participation in the plan and provide additional retirement savings for valued employees.
3. Employer contribution flexibility
Although employers must make contributions to employee accounts, there are two different plan types with various contribution formulas to choose from.
A traditional safe harbor plan requires a specific formula for employer safe harbor contributions and that those contributions vest immediately.
A qualified automatic contribution arrangement (QACA) safe harbor plan allows for slightly lower employer matching contributions and permits employers to apply a short vesting schedule to the employer safe harbor contributions.
Both plan types also offer three contribution formulas: basic match, enhanced match, and nonelective. You can learn more about the requirements and variations of traditional and QACA safe harbor plans here.
If you are interested in setting up a safe harbor plan, feel free to contact Guideline client support. The deadline to add safe harbor provisions is November 20 to be applicable for the next plan year, effective January 1. You can review safe harbor formulas and deadlines here.
Still not sure if safe harbor is right for you? Read success stories on how a Guideline safe harbor 401(k) can help boost savings and reduce admin work.