When to Set Sail with Safe Harbor

A 401(k) plan is a popular retirement benefit, offering tax advantages on contributions and earnings for your employees. To ensure these benefits extend fairly to all employees, the IRS requires annual nondiscrimination testing, including:

• ADP Test: Compares highly compensated and non-highly compensated employees’ deferral rates.
• ACP Test: Assesses matching contributions between these groups.
• Top-Heavy Test: Ensures key employee accounts don’t exceed 60% of total plan assets.

If your goal is maximizing retirement contributions, Safe Harbor provisions can allow you to bypass these tests. Safe Harbor options include:

Safe Harbor Match Options

To encourage participation, you can offer:

• Basic Match: 100% match on the first 3% deferred, plus a 50% match on deferrals from 3% to 5%.
• Enhanced Match: 100% match on the first 4% deferred.

Non-Elective Contributions

Another option is a 3% non-elective contribution for all eligible employees, including those who do not defer. Safe Harbor contributions are always 100% vested, meaning employees own these funds immediately.

Qualified Automatic Contribution Arrangement (QACA)

The QACA Safe Harbor design offers a structured automatic enrollment plan. Key features include:

• Automatic enrollment at a minimum of 3%, increasing annually to 6%.
• Qualified default investment option for those who don’t choose one.
• Matching formula: 100% on the first 1% and 50% on the next 1% to 6% (3.5% total).
• Optional 2-year cliff vesting for the match, offering flexibility for employers.

Benefits of Adopting Safe Harbor

• Eliminates nondiscrimination testing requirements, potentially reducing costs.
• Allows highly compensated employees to maximize deferrals.
• Addresses top-heavy status concerns.
• Provides competitive benefits for employee retention.

Contact us to discuss how Safe Harbor provisions can enhance your plan’s success and support your employees’ financial futures.