To qualify as a nondiscriminating defined contribution plan, it must meet which two safe harbors?
At Human Interest, we support different kinds of 401(k) designs for small businesses. One plan design we recommend quite often is the safe harbor 401(k) because it’s a great way for employers to reward employees and simultaneously save themselves tons of administrative hassle. So, what’s so special about a safe harbor plan? Let’s review. Show
Interested in learning more? Talk to our experts on launching a safe harbor 401(k) plan. What is a safe harbor 401(k) plan?A safe harbor 401(k) plan ensures all eligible plan participants receive an employer contribution. In exchange for making the fixed employer contribution, employers get a “pass” on key 401(k) nondiscrimination tests (one of the checks the IRS puts on 401(k) plans to ensure they’re equitable to all employees). What are the requirements of a safe harbor plan?Any 401(k) plan can be designed to include a safe harbor contribution. When considering a safe harbor plan design, employers should understand that the employer contribution is a fixed, mandatory contribution. In most cases, that employer contribution is required to be immediately 100% vested. However, there are restrictions on amending a safe harbor plan mid-plan year (more on this below). Use our free safe harbor calculator to find out. Learn More For new 401(k) plans, timing restrictions will dictate the type of safe harbor plan design available in the initial (or first) plan year. If you currently have a 401(k) plan that’s not safe harbor, you may have to wait until the next calendar year to be able to launch a safe harbor plan. The three safe harbor contribution formulasThere are three basic “types” of safe harbor 401(k) plans. You must meet ONE of the following for your plan to be considered a legal safe harbor plan (unless you use a QACA formula as described later):
The employer safe harbor contribution must be immediately 100% vested. Qualified automatic contribution arrangement (“QACA”)All safe harbor plan designs may include an automatic contribution arrangement (ACA), which treats an employee who fails to make an election as having elected to defer the default percentage set by the plan. The employee can opt out of the default at any time. A specific combination of safe harbor required contributions and ACA provisions make a plan a QACA plan. Unlike other safe harbor designs, QACA plans are permitted to use a two-year cliff vesting schedule for employer safe harbor contributions. Some employers are willing to jump through additional design hurdles to take advantage of this two-year vesting schedule. Which safe harbor contribution formula to consider?A safe harbor match design is best suited for employers that want to actively encourage employees to save by motivating them with the matching employer contribution. An employee will only receive a safe harbor match contribution if they make employee elective deferrals to the plan. At Human Interest, the 4% safe harbor match is the most common type of match among our customer base*. Companies that want to go above and beyond for their employees can offer a higher percentage match and still qualify for safe harbor. Non-elective contribution safe harbor designs are more expensive for the employer because every eligible employee gets an employer contribution, regardless of their choice to make employee elective deferrals. Despite the extra cost, there are times when a nonelective formula makes the most sense for an employer, due to:
Because safe harbor contributions must be made annually, companies are implicitly required to have strong cash flow to meet their commitments. Actively managing your company’s safe harbor 401(k) plan can help ensure your company can make contributions in full and on time. *Human Interest internal data, 2022 Safe harbor 401(k) deadlinesSafe harbor plans have strict deadlines. We recommend communicating with your service provider as early as possible to determine if there are any timing limitations at the service provider level, in addition to the legal deadlines, that may restrict your ability to implement the safe harbor plan design of your choice. Timing restrictions to be aware of include: Deadlines for new plans:
Deadlines for a safe harbor match design in the initial year:
Deadlines for a safe harbor nonelective design in the initial year:
*Keep in mind that in order to take advantage of the safe harbor nonelective opportunities in the initial plan year, the plan must provide a deferral opportunity of at least 3 months to participants. Deadlines for existing plans (not in their initial year) - Adding safe harbor design or modifying safe harbor provision:
Deadlines for adding or modifying a safe harbor match design (includes switching from existing safe harbor nonelective to safe harbor match design):
Deadlines for adding or modifying a safe harbor nonelective design:
Additional restrictions on safe harbor plansSome changes to a safe harbor plan are always prohibited mid-year, while other changes may be permitted if certain requirements are met. There are also restrictions on mid-year reduction or suspension of safe harbor contributions. Any permissible change will require advance notice to employees and may also subject the plan to nondiscrimination testing for the full plan year. An employer that chooses to add a safe harbor design to its 401(k) plan should be aware of these restrictions. It should also be aware that the rules regarding mid-year changes are complex, and may require the employer to seek guidance from a service provider or an attorney. Safe harbor contribution limitsBasic employee deferral limits for safe harbor 401(k) are the same as a traditional 401(k) plan. In 2022, these contribution levels are $20,500 ($27,000 for those aged 50 and over). What’s more, safe harbor provisions enable owners and highly compensated employees (HCEs) to max out deferrals without risking nondiscrimination failure. When should your company consider a safe harbor plan?Safe harbor plans are beneficial for both employers and employees, as we’ll describe in the next section. But there are certain circumstances when safe harbor plans are even more advantageous as tools to protect your company:
Sign up for an affordable and easy-to-manage 401(k). Get Started Safe harbor plans and key employeesSafe harbor plans are particularly valuable for small and medium-sized businesses, especially if your key employees want to actively contribute to the company 401(k) plan. For small companies: If key employees contribute heavily to the 401(k), the plan is at risk of being top-heavy. If a plan is top-heavy, employers must make a top-heavy minimum allocation (additional employer contribution) to non-key employees. This can be an unexpected and expensive issue for an employer. Plans that use a safe harbor design are deemed to pass top-heavy testing as long as there’s not a separate profit-sharing contribution made to the plan. In these cases, adding a safe harbor contribution to the plan will allow key employees to make their preferred level of contributions and protect the employer from having to make additional top-heavy contributions. If the plan includes profit-sharing contributions, adding a safe harbor contribution will not eliminate top-heavy testing or the risk that top-heavy contributions will be required. However, if the plan is top-heavy, the safe harbor contributions can be used to offset all or part of any top-heavy minimum contribution you may owe to non-key employees. For companies with 50-80 employees: Even at companies with dozens of employees, non-HCEs may not be contributing enough for HCEs to max out their 401(k) contributions. However, a safe harbor plan provides the freedom to contribute more fully without jeopardizing the standing of the company’s plan. This can help incentivize key HCEs to continue their employment with your company instead of looking for more flexible benefit offers elsewhere. Benefits of having a safe harbor 401(k) planRemember, the government wants to encourage and incentivize 401(k) plans by offering tax benefits to both employers and employees; however, it also wants to ensure employers are not taking advantage of tax benefits while excluding employees. That’s why the IRS administers 401(k) nondiscrimination testing. The benefits of safe harbor plans include:
Disadvantages of a safe harbor 401(k) plan
Essentially, a safe harbor plan’s main benefit is convenience—as it offers less testing hassle and more flexibility in contributions. However, the downside is that it’s not free and comes at a slight cost in terms of administrative work, as well. How much does a safe harbor 401(k) plan cost?The more employees you have, and the higher their salaries are, the more expensive a safe harbor 401(k) will be for your company. If you offer a non-elective safe harbor plan, it will be easier to calculate the total budget for the plan because it is that percent of your total payroll. For instance, companies offering a 3% non-elective contribution, with 10 employees each earning $60,000 each, would contribute $60,000 x 10 x 3% = $18,000 total. How much does a 401k cost an employer? For the safe harbor match, total cost will depend upon employee contributions—so it’s more difficult to predict, but typically cheaper overall (in terms of employer cost) than a non-elective safe harbor. Use our safe harbor calculator to get a better idea of how much a plan will cost your business. And if you’re looking for a great 401(k) for your employees, click here to request more information about Human Interest. Sign up for an affordable and easy-to-manage 401(k). Get Started Article By The Human Interest Team We believe that everyone deserves access to a secure financial future, which is why we make it easy to provide a 401(k) to your employees. Human Interest offers a low-cost 401(k) with automated administration, built-in investment education, and integration with leading payroll providers. What is a traditional safe harbor match?With a safe harbor plan, the rules for employer contributions require plan sponsors to make a traditional match that equals 4% of employee deferrals—for example, 100% of employee deferrals up to 3% of compensation plus 50% of employee deferrals between 3% and 5% of compensation—or a qualified non-elective contribution ...
What is a qualified defined contribution plan?A defined contribution plan is a common workplace retirement plan in which an employee contributes money and the employer typically makes a matching contribution. Two popular types of these plans are 401(k) and 403(b) plans.
What is the maximum contribution for a defined contribution plan?100% of the participant's compensation, or. $66,000 ($73,500 including catch-up contributions) for 2023; $61,000 ($67,500 including catch-up contributions) for 2022; $58,000 ($64,500 including catch-up contributions) for 2021; and $57,000 ($63,500 including catch-up contributions).
What are the two types of pension plans?The Employee Retirement Income Security Act (ERISA) covers two types of retirement plans: defined benefit plans and defined contribution plans. A defined benefit plan promises a specified monthly benefit at retirement.
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