Employer dollar-for-dollar match on the first 4% of the employee’s elected salary deferral.Safe harbor can be achieved in several ways: The eligibility requirements for the employer contribution must match the employee contribution requirements. Employers can choose a wait period and entry age of their choice capped at one year of service / 1,000 hours worked and 21 years of age. Required at least 30 days prior to implementation and annually thereafter.įlexible. Keep in mind that selecting features outside of these parameters may be possible, but selecting alternate features may prevent you from maximizing the benefits of a safe harbor plan. Below are the simplified rules for both traditional and safe harbor plan designs. Safe Harbor 401(k) and Traditional 401(k) Plans: A ComparisonĪs with most tax-sheltered savings plans, the features you choose can trigger certain rules that impact the overall goals you are looking to achieve. Employers that currently have a traditional 401(k) plan and would like to amend the plan to a safe harbor 401(k), may only implement this change at the start of a new calendar year. traditional 401(k), any employer contribution is vested immediately at 100%. A required match or noncontributory election.The safe harbor 401(k) plan is not subject to the complex annual nondiscrimination tests that apply to traditional 401(k) plans. These contributions may be employer matching contributions, limited to employees who defer, or employer contributions made on behalf of all eligible employees, regardless of whether they make elective deferrals.

The Solution: Implement The Safe Harbor Plan What is the safe harbor plan?Īccording to the IRS, a safe harbor 401(k) plan is similar to a traditional 401(k) plan, but, among other things, it must provide for employer contributions that are fully vested when made. Learn how to avoid these mistakes in this free guide. Processing payroll doesn’t have to be complicated or expensive-but if you’re doing it the wrong way, it can be both. This is a source of frustration to highly compensated individuals, because they can’t max out their contributions, thus lessening their ability to reach their investment goals with their 401(k) plans. Everything above that is returned to them as compensation-and it is taxed. Under the ADP and ACP testing rules, the highly-compensated employee can contribute only 4%, which is based on the average of the non-HCE group rate, plus an additional 2%. The 5 employees are considered non-participating because they are eligible to participate and don’t their non-participation brings down the average. Thus, the average of those 10 eligible employees is 2% of the entire group. Of those 5 employees, each contributes 4%. Of the remaining 10, only 5 contribute to a traditional 401(k) plan. Of those 11 people, only one is considered highly compensated. Imagine your company has 11 people who are eligible to contribute to a 401(k) plan. Looking for a clear, thorough guide to the entire payroll process for small businesses? Download The Small Business Guide To Payroll In many cases, they get a refund for excess contributions, because as a general rule, highly compensated employees can’t contribute more than 2% of the average of all other employees who are eligible to participate. Oftentimes, owners try to stash away the maximum amount allowable per year, unaware they may be over-contributing to the plan. Key employees are defined as employees who own more than 5% of the business, their spouses, and lineal relatives, as well as certain shareholders and company officers. Top-heavy testing: This rule prevents plan assets of key employees to be comprised of 60% or more of the total assets in the plan.ADP and ACP testing: These special non-discrimination rules ensure that deferrals made by HCEs are not disproportionate to deferrals made by non-HCEs.The Problem With Traditional 401(k) PlansĪ traditional 401(k) plan limits business owners, company officers, and high wage earners, often referred to as highly compensated employees (HCEs) in how much money they can contribute to the plan.

Here’s why this happens, and what you may elect to do instead. Sometimes, the traditional 401(k) plan doesn’t end up providing you the full benefit you’d hoped for. If you’re a small business owner interested in starting a 401(k) plan for your employees, you already understand how they will benefit, but you should also understand how the plan will affect you.

Safe harbor match