When offering retirement plans for your employees, you must review all characteristics of the available options to experience the best possible benefits for both yourself and your staff. Often, you will be expected to match your employees’ contributions to their 401(k) accounts to some extent. With these matching contributions that you offer, you stand to reap specific benefits, such as tax deductions and breezing through IRS testing, as in the case of the Safe Harbor 401(k) plan. To learn more about this option, see the overview provided below.
The Basics of Safe Harbor Matching
The Safe Harbor plan is one of the many 401(k) contribution structures, known particularly for its employer tax deduction benefits and the avoidance of certain IRS (Internal Revenue Service) testing each year.
When you, as an employer, opt for the Safe Harbor 401(k), you can select between a variety of contribution matching amounts. These range from 3-6% of either your staff’s monthly contributions or their annual salary. As of this year, employees can contribute the following amounts, according to their age bracket:
- Employees younger than 50 years old: $19,500
- Employees that are 50 years of age or older: $26,000
Once you have committed to one plan, you and your employee can accumulate up to $57,000 in contributions in total.
Advantages and Matching Options Under the Safe Harbor Plan
There are three primary options for matching under the Safe Harbor plan:
- Basic: Under this choice, you will be required to match your employee’s contributions according to the following tiers:
- You will match the first 3% of your employee’s contribution dollar–for-dollar.
- With the next 2% of the employee’s contributed compensation, you will provide a 50% match.
- Enhanced: Although you can choose to match dollar-for-dollar up to 6% of employee contributions, you will be required to match 100% of their contributions up to 4%.
- Nonelective: You will provide a minimum contribution of 3% of a worker’s salary, regardless of whether they contribute to the 401(k) themselves. (This, of course, applies only as long as the employee meets the plan eligibility criteria.)
The Safe Harbor 401(k) plan is highly attractive to both employees and business owners due to the abundance of advantages provided on both sides. In addition to the benefits mentioned earlier, you will also be relieved from the pressures of specific IRS tests, including those listed here:
- Actual Deferral Percentage (ADP): Small businesses are most often affected by this test, which limits contributions of Highly Compensated Employees (HCEs) to no more than 2% more than other employees.
- Note: HCEs are any staff that earns $125,000+ annually or have greater than a 5% stake in the company.
- Actual Contribution Percentage (ACP): This enforces equal contributions from employers among employee 401(k)s, limiting contributions to HCEs and stakeholders relative to all other staff. The average contribution rate for HCEs to non-HCEs must not exceed 125%.
- Top-Heavy: Through this test, employers will be prevented from allowing what the IRS considers “key employees” from holding any less than 60% of the total Safe Harbor plan balance.
- Note: Key employees include company owners, officers, and similar roles.
If you would like further information to determine if this is the right retirement plan for you and your employees, get in touch with a 401(k) plan advisor today.