September 1, 2020: 30-day notice must be sent to employees for a Safe Harbor matching plan. Each eligible employee must be notified in writing about their rights and obligations under the plan annually. At the end of the day, a quality TPA is a problem solver. But many companies think the upside more than outweighs the cost. In addition, you may be making an employer contribution under a profit sharing plan. The main requirement for a traditional Safe Harbor 401(k) is that the employer must make contributions, and those contributions must vest immediately. To get a detailed look at all these definitions, how the tests are applied, and see examples, check out our overview of the three 401(k) nondiscrimination tests. Notice should be given 30 to 90 days before the changes go into effect. A Safe Harbor 401k plan is a special type of retirement plan that is flexible, cost effective and extremely popular. It can generally take 2 to 3 weeks to set up the plan. This requirement is important because Americans are abysmal at saving for retirement. The Administrator, in consultatio… Safe harbor plans have many deadlines that must be followed. This requirement is important because it can help increase savings. The goal of 401(k) plans, after all, is to prepare more Americans for retirement, not to create a tax break that’s exclusively for business owners and executives. Under a safe harbor plan, employers can select between two contribution options: The employer can match 100% of the employees first 3% contribution, plus 50% of the subsequent 2%. As a general rule, the government wants to make sure that 401k plans don’t just favor highly compensated employees (HCEs) over non-highly compensated employees (NHCEs). If the loan is COVID-19 related and taken out between Mar. Many 401k plans provide for employer matching contributions to encourage and reward elective deferrals by employees and to maximize employee appreciation of the plan. Highly compensated employees are typically defined as individual(s) with more than 5% ownership, the family members of a more than 5% owner (this includes spouse, parents, children and grandparents), or employees who make more than $125,000 in the prior calendar year. Remember, there is an employee 30-day notice requirement, and it may take some time for your administrator to amend the plan, so try to get this taken care of by the end of November to go into effect January 1. With a safe harbor 401(k) vs. traditional 401(k), any employer contribution is vested immediately at 100%. But you will need to consider if you are making pre-tax or Roth contributions. Hedge funds and private equity funds are held by the SBA to be ineligible to receive a PPP loan. It has certain built-in elements that help all employees save by requiring companies to contribute to their employees’ 401(k) accounts. If your plan fails any of these tests, you’ll have to deal with some administrative hassle, potentially expensive corrections, and the possibility of refunding 401(k) contributions. Emparion, LLC | 2450 S. Gilbert Road #100 | Chandler, AZ 85286. Offering a safe harbor 401k should result in happier employees, tax deductions, and the ability to make a full employee deferral into the plan for yourself. The safe harbor applies if the loan is re-amortized after the suspension period (which must not end later than December 31, 2020) over the remaining period of the loan plus … Plan to match employee contributions anyway, Worry about passing nondiscrimination testing, Have low participation among NHCEs and non-key employees, Care deeply for the wellbeing of their employees. Luckily, the specifics for mid-year changes are referenced in IRS Notice 2016-16. 401k plans are popular retirement vehicles for both large and small companies. A Safe Harbor plan uses a structure that automatically satisfies the Internal Revenue Service’s requirements for nondiscrimination on elective deferrals and employer matching contributions. A Safe Harbor 401(k) helps you avoid all the uncertainty surrounding annual testing. If so, a Safe Harbor 401(k) might be a better way to go because it generally allows your plan to skip them altogether. Notice of the change should be given 30 to 90 days before any change is allowed to go into effect. Businesses who find it difficult to fund matching contributions might find that a 401k plan without a safe harbor provision might be a better fit. Required fields are marked *. Each notified employee should have at least 30 days to change any cash or employee deferral election. Safe harbor 401k plans are one of the most popular 401k retirement plans for businesses that have employees. 401(k) plans can be set up in a variety of ways. The SBA clarified types of businesses that are and are not eligible to obtain a PPP loan in Section III.2. The safe harbor 401(k) plan is not subject to the complex annual nondiscrimination tests that apply to traditional 401(k) plans. This is a broader term that has its use in real estate and finance. Many business owners who establish a safe harbor 401k can choose from many different third party administrators (TPAs). The IRS wants to see that all eligible employees are benefiting from the plan, not just the ones in the high paying positions. A required January 1 election. However, as your company profits grow and you are considering substantial retirement contributions, you can consider a defined benefit plan. But most companies realize that the upside of the plans far outweighs the downsides. It’s easy to do, but it will require the employer to make contributions for certain employees. Whether you have a safe harbor 401k plan or another retirement structure, the TPA is a critical factor to plan success. Safe Harbor 401(k) contribution limits A high level of expertise is critical to running the plan effectively. The TPA will review plan design and provide the company personal attention. And what do all those acronyms mean? Safe harbor plans can also increase employee retention and provide an incentive for prospective new hires. The Actual Contribution Percentage (ACP) test is similar, but it compares employer contributions to HCEs with everyone else. Like a traditional 401k, it offers flexible and fully tax-deductible employer contributions together with tax-sheltered growth of plan assets. There are many advantages to safe harbor 401ks. So, make sure you talk to your 401(k) plan provider well before September 1. Specifically, safe harbor plans allow business owners to: So let’s get into the details. Make sure you work with a TPA that has requisite experience for any plan you select. The employer has the option of depositing matching or profit sharing contributions. This test examines whether the account balances of key employees is greater than 60% of total plan assets. A safe harbor 401 (k) offers significant benefits to workers, including automatic employer contributions to their retirement fund, potential tax deductions and … The IRS waives the 10% early withdrawal penalty when you need to purchase health insurance or need to take out money because you’ve experienced an extended run of unemployment. Several types of changes are not permissible during the year, however, so review the rules carefully if you wish to amend your plan. Once you have decided the plan that makes most sense for you, you will need to design a written plan document. Safe harbor 401(k) plans feature simple, alternative methods for meeting non-discrimination requirements. The employer can match 100% of the first 4% of employee contributions. These accounts are 100% vested and must be funded on a per-pay-period basis. Contribute 3% of each eligible employee’s compensation regardless of whether or not the employee chooses to participate in the plan. You must notify eligible employees of the plan benefits and requirements. Discover retirement tools and tips to help you save money. A safe harbor provision can be added to any type of 401k plan. Part of adopting the plan will be deciding various plan provisions like (but not limited to): (1) including a Roth; (2) allowing rollovers; (3) providing a loan provision. The notice must be given within a reasonable time frame. To make sure everyone has a chance to benefit from the plan their employer offers, the IRS has set up a series of what it calls “nondiscrimination” tests that are designed to measure whether a 401(k) plan unduly favors highly compensated employees. But there are certain changes that are not permissible during the year. In addition, there are pros and cons to different plans. If you are considering setting up a Safe Harbor plan for your company, you will need to know the rules … All the details for mid-year changes are included in IRS Notice 2016-16, but these are the basic things the IRS requires: Once you’ve satisfied the notice rules above, you may be able to make changes to certain aspects of the plan including, for example, increasing future safe harbor non-elective contributions from 3% to 4%, or changing the plan entry date for eligible employees from quarterly to monthly. Should the plan have no eligible NHCEs participants, then none of the HCEs would be able to participate. Safe Harbor deadlines If you are looking to add a safe harbor provision to a current plan, your administrator can prepare a plan amendment that can go into effect January 1st of any year. According to the Economic Policy Institute (EPI), close to half of all American families don’t have any retirement savings, and among families nearing retirement, the median savings is only $17,000. Under the current 401(k) hardship rules, a participant must first take all distributions and loans currently available to that person in order to qualify for a hardship distribution. Are you going to self-direct the funds and buy alternative assets like real estate, notes, etc? Make sure that a safe harbor 401k is the right plan for you. 401(k… Safe Harbor employer contributions are also immediately vested, making it easier for some employees to leave a company sooner than if they had to wait a few years to become 100% vested in a traditional 401(k). ... CARES Act Relief for Retirement Plan Loan Payments is Ending, ... Get our 401(k) and defined benefits content delivered directly to your inbox. The employer can contribute 3% of compensation to all employees that are eligible. These tests are typically required to be performed on plan to ensure that employees are treated fairly: So what is a highly compensated employee (HCE)? When your business is a start-up or in modest growth mode the Safe Harbor 401k should work just fine. This is because owners are considered employees as well. They include: (1) traditional 401k plans; (2) safe harbor 401k plans; (3) SIMPLE 401k plans; and (4) solo 401k plans. A third test, the Top-Heavy test, looks at individuals the IRS defines as “key employees” and measures the value of the assets in their 401(k) accounts, compared to all assets held in the 401(k) plan. Most of the process can be accomplished by hiring an experienced TPA that can work with you to design, establish, and administer the plan. Are you going to put the money in the bank? Safe Harbor 401(k) Resources. Any information herein is for educational purposes only and should not be considered tax, legal, or investment advice. Ultimately, it should result in big savings for the business owner and eligible employees. Like a traditional 401k, it offers flexible and fully tax-deductible employer contributions together with tax-sheltered growth of plan assets. A safe harbor 401k is a specific plan structure that automatically passes the non-discrimination test or avoids it altogether. So if you do not have a safe harbor plan, the owner and any other HCEs will be able to defer only about 2% more than the average of the eligible Non-Highly Compensated Employees (NHCEs). This will typically be a retirement plan provider, financial institution, or third party administrator (“TPA”). The matching contributions are usually a small price to pay to ensure you’re your plan passes IRS testing. of the April 24 interim final rule. Provide plan information to participants. Accordingly, the SPD will be provided to you by the entity who establishes the plan on your behalf. But minimal for solo 401ks. If your 401(k) plan allows loans, you can generally take a loan when the following conditions are met: The amount of the loan cannot exceed the lesser of : $50,000, minus your highest outstanding loan balance during the past 12 months, or The safe harbor 401k plan is much like a traditional 401k with a few key differences. 6 reasons to open a Safe Harbor 401(k) plan, What the coronavirus relief package means for your 401(k) account. Plan administration can be very complex for traditional 401k plans. These plans include the following special rules: The QACA safe harbor matching contribution formula is a 100% match on the first 1% of … A safe harbor 401(k) has the same annual contribution limits as a traditional 401(k) - $19,500 in 2020 plus an additional $6,500 catch-up contribution for those 50 … Enhanced matching: The company matches at least 100% of all employee 401(k) contributions, up to 4% of their compensation (not to exceed 6% of compensation), 3. The final rules were issued to protect employee contributions deposited to small pension and welfare benefit plans with fewer than 100 participants by providing a safe harbor period of seven business days following receipt of withholding by employers. Paul has written articles on retirement planning for Inc., Kiplinger and others. It is a way to structure retirement plans that pass the nondiscrimination tests. Once your 401k is established, you are required to make certain employee communications. A combined notice may be provided to employees. Defined Benefit Plans | Cash Balance Plans. Unlike a traditional 401(k) plan, they automatically pass the ADP/ACP and top heavy nondiscrimination tests when certain contribution and participant disclosure requirements are met. How to Set Up a Defined Benefit Plan: 5 Start Up Tips, Cash Balance Plan Contribution Deadline: Don’t Miss This Date, Best Cash Balance Plans: The #1 Retirement Structure, Life Insurance in a Cash Balance Plan: 3 Simple Steps, Cash Balance Plan Example: The Simple $189k Illustration, How to Use a Solo 401k When You Only Have Rental Real Estate, Contribute the maximum annual employee deferral of $19,000 to their own account. August 21, 2020: Deadline for setting up your Guideline Safe Harbor 401(k) Plan for the existing year. This trade-off is well worth the cost for many business owners, who often bear the brunt … These responsibilities often include: In addition to the compliance and administrative tasks, a good TPA will assist clients in determining the proper plan design and help them maximize the plan attributes. Your plan will run smoothly and efficiently if it receives the careful and consistent attention of experienced plan administrators, with advanced computer support systems, working closely with your office staff. The government has set forth certain compliance tests to make sure that all employees are fairly represented in the plan. Factors affecting plan complexity include the basic plan design, the number of investment options offered to employees, and optional provisions such as loan and hardship withdrawal provisions. Instead of the current safe harbor — which includes requiring an elective deferral suspension of at least six months and taking all other distributions, including loans, as conditions to be deemed a hardship — a distribution will now be viewed as necessary to satisfy an immediate and heavy financial need only to the extent the employee has taken all other available distributions from the plan and other deferred compensation plans of the employer other than loans. A Safe Harbor 401(k) is easier and less expensive to administer than a traditional 401(k), but the cash needed to fund employer contributions will likely be higher overall. Feel free to jump ahead if you’re trying to answer a specific question: A Safe Harbor plan will exempt you from complying with the annual nondiscrimination tests required by law. But what does a TPA actually do and why do you need one? The Notice provides a safe harbor for implementing these plan loan suspension rules. Essentially, the IRS wants to know if a highly compensated employee or the business owner is maxing out 401k contributions annually, while the remaining employees are not benefiting from the plan. Give each notified employee at least 30 days to change their cash or deferral election. Many business owners prefer this model over the traditional style of 401k. Subscribe for Updates. This is at least 30 days, but no more than 90 days before the beginning of the plan year. A safe harbor 401 (k) plan is one that's set up to give employers some flexibility regarding IRS nondiscrimination rules for contributions. But you need to determine how you are going to invest the money. That is the earliest age the law allows a participant to take an in-service distribution from his or her 401 (k) deferral account and, if applicable, accounts holding Qualified Nonelective Contributions (QNECs – includes safe harbor nonelective contributions) and Qualified Matching Contributions (QMACs – includes safe harbor matching contributions). We do not sponsor or endorse any investment and are not affiliated with any investment product sponsor or issuer. This will serve as the basis for the plan rules and govern how the plan is administered. If you’re thinking about offering a Safe Harbor 401(k), here’s what you need to know. Schedule a FREE 30 minute call: Defined Benefit Plan Illustration in 60 Seconds! Starting a 401k should not be that difficult. In this post, we will look at all the safe harbor 401k rules and deadlines. A safe harbor 401k plan will generally satisfy non-discrimination rules for both elective deferrals as well as employer matching contributions. For new plans, October 1 is the final deadline for starting a new Safe Harbor 401(k). If your plan were to fail one of these tests, it could mean making expensive corrections, a lot of administrative work, and potentially even refunding 401(k) contributions. Follow the five steps above and you will be well on your way. If you want to add a Safe Harbor nonelective provision to an existing 401(k) to take advantage of Safe Harbor status for the year, you may do so at any time before December 1st, so long as you are willing to pay the minimum 3% contribution for the entire plan year. If these requirements are at all confusing, we’d be happy to help. Among other plan loan changes, the CARES Act allows certain loan repayments due by QI to be suspended. If you are over the age of 50 then you are allowed a $25,000 catch up contribution. The implementation of a 401k plan provides the opportunity for retirement savings by the employees themselves which is tax deferred. November 30, 2020: Deadline for requesting the addition of a Safe Harbor matching provision to your 401(k) plan for the following year, December 2, 2020: 30 day notice must be sent to employees, January 1, 2021: Safe Harbor matching provision takes effect and exempts the plan from nondiscrimination testing. Safe Harbor 401k: The Complete Guide [Infographic]. So why would someone select a safe harbor 401k plan over a traditional 401k? Under the existing (pre-2020) regulations, only earnings on elective deferrals before 1989 are eligible for hardship withdrawal; none of the restricted contribution sources or the earnings on them is … 401(k) Safe Harbor Rules. October 1, 2020: Safe Harbor 401(k) Plan is effective and exempt from nondiscrimination testing for 2019. For 401(k) and 403(b) plans, hardship distributions must be made on account of an immediate and financial need, and the amount must be limited to the amount necessary to satisfy the need, according to the IRS. Safe Harbor plans require that you create incentives to encourage more of your employees to take advantage of your 401(k), by matching or otherwise contributing. When employers take this step to encourage more employees to participate, the IRS offers them “safe harbor” from both the nondiscrimination testing process and the consequences of failure. Offering a Safe Harbor 401(k) plan will give you happier employees, tax savings, certainty that your plan won’t fail testing, and more retirement savings for everyone (including yourself). If you don't pay a 401(k) loan back within five years, the outstanding balance will be considered a 401(k) distribution. Your email address will not be published. Drafting and designing any plan documents; Updating and amending the plan (as necessary); Processing 401k distributions and rollovers; Completing any required non-discrimination testing (if necessary); Calculating the business contributions along with forfeitures; Determining and tracking employee vesting percentages; Completing the annual reporting requirements, including filing, Maintaining operational compliance with the. A Safe Harbor 401(k) is exactly the same as a traditional 401(k), except it has a mandatory employer contribution built-in. Basic matching: The company matches 100% of all employee 401(k) contributions, up to 3% of their compensation, plus a 50% match of the next 2% of their compensation, 2. a. The provision requires the employer to make contributions to each employee’s retirement plan at a uniform percentage of at least 3% of the employee’s salary. 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. So in order to avoid non-discrimination testing, the business owner must contribute to the employees’ accounts. If you want to add a Safe Harbor matching provision to an existing 401(k), your administrator can make a plan amendment that goes into effect January 1 of any year. What is a Safe Harbor 401k? Don't worry. He focuses on cash balance plans and other defined benefit plans. How much should you pay in 401(k) plan fees? We’ve helped many companies set up compliant 401(k) plans, and we can walk you through all the basics. Your TPA will typically provide the necessary administrative and compliance tasks. SECURE Act Changes to Safe Harbor 401 (k) Plan Notices The SECURE Act eliminated the requirement that an advance notice of traditional safe harbor status on account of a 3% nonelective employer contribution must be provided at … Making contributions to your employees’ 401(k) is the most notable Safe Harbor requirement, but there are additional rules surrounding when and how you offer your plan. The notice outlines that employees must receive an updated safe harbor notice that details any plan changes. The estimated safe harbor rule has three parts: If you expect to owe less than $1,000 after subtracting your withholding, you’re safe. A safe harbor plan allows you to automatically pass these non-discrimination testing rules by making certain contributions to participating employees. Safe harbor plans allow business owners to maximize contributions to their own account while minimizing many of the IRS rules. Each plan has a different set of rules and requirements. Here are some of the advantages that you can realize by investing in a safe harbor 401k … (Note: The new nonelective rule was passed by Congress in late 2019 under the SECURE Act and gives more flexibility for those plans who didn’t know they were going to fail nondiscrimination testing and would like to rectify.). Non-elective contribution: The company contributes at least 3% of each employee’s compensation, regardless of whether employees make contributions. Each scenario has different reporting and are reflected differently when it comes to tax time. However, the term safe harbor isn’t just something related to 401k. Receive additional retirement savings from the company’s matching contributions. What do you have to do to offer one? Is a hedge fund or private equity firm eligible for a PPP loan? The main advantage of Safe Harbor 401(k)s is that they are generally exempt from IRS nondiscrimination testing, which allows business owners and highly-compensated employees (HCEs) to receive much more in contributions without putting … You will need to hire someone to establish the plan. However, for safe harbor plans, contributions are required to be fully vested when made. But don’t forget the 30 day notice requirement. There are many different options to choose from. The third option requires your company to make a contribution, even if employees don’t defer any of their income into their plan. Start a 401(k) with no added investment fees, Additional requirements for a Safe Harbor 401(k), Schedule a quick consult to get hands-on help setting up your 401(k). But it will require a written notification to employees along with a little education. 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