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In the United States, many businesses use the extremely popular Safe Harbor 401(k) plan. This is an employer-sponsored retirement plan that enables small business owners to make sure they are compliant with the Internal Revenue Service.

They also use the Safe Harbor 401(k) to ensure that each of their employees, including themselves, no matter their salary or their income level, can maximize their company’s 401(k) plan. If an employee’s 401(k) plan includes the Safe Harbor provision, that means the employer will make annual contributions on behalf of their employees, which will be immediately vested.

To fully understand how an owner can maximize their contributions, there needs to be an understanding of how the Safe Harbor Plan works.

How the Safe Harbor 401(k) Plan Works

Under the Safe Harbor 401(k) Plan, there are three options employers can choose from to contribute towards their employee’s retirement. Two of these are considered employer matches, which people refer to as the “Safe Harbor Match.” In addition, there are certain requirements that an employer needs to follow to make sure that their Safe Harbor 401(k) plan is properly set-up.

Non-Elective Safe Harbor
Under the Non-Elective Safe Harbor plan, an employer contributes at least 3% of each employee’s compensation. This amount is immediately fully vested, and the employee gets it whether they decide to contribute to the plan or not.

Basic Safe Harbor Match:
Under the Basic Safe Harbor Match, the company provides 100% matching of the first 3% of each employee’s contribution, plus an additional 50% of the next 2%. However, under this plan employees are required to contribute to their 401(k) to receive this match.

Enhanced Safe Harbor Match:
In this situation, the company matches 100% of the first 4% of each employee’s contribution (may be increased up to 6% without violating the ACP test safe harbor). Under the Enhanced Safe Harbor Match, the employees are also required to defer money to their 401(k) to qualify for this match.

How to Adopt the Safe Harbor
For New Plans: The Safe Harbor provisions have to be in place for at least three months if a company is adopting a new 401(k) or 403(b) plan. This means the plan must be in place no later than October 1 to include Safe Harbor provisions for that first plan year.

For Existing Plans: The Safe Harbor provisions can only be included to an existing 401(k) plan before the beginning of the plan year. Also, they must be in effect for the entire year.

Timing Requirements
Under the Safe Harbor Plan, certain timing requirements need to be met by the employer. Under these provisions, the employer is required to provide a Safe Harbor Notice within a reasonable period before each plan year. This requirement is deemed to be satisfied if the notice is provided to each eligible employee at least 30 days and not more than 90 days before the beginning of each plan year. This Notice will usually discuss the following: a description of applicable provisions for the upcoming year, withdrawal conditions, employee contribution conditions, pre-tax contribution conditions, and a disclaimer that the employer is not required to offer the Safe Harbor Plan.

How to Max Out Contributions

The purpose of the 401(k) plans, is to make sure that all Americans are ready for retirement, not to create tax breaks that are solely for business owners and top executives. That’s why the government created the Safe Harbor 401(k) Plan. Not only to help companies avoid the IRS non-discrimination rules testing mandates, which can be a large burden on small businesses, but also to make sure the company ensures a balanced playing field for all its employees, providing access and equal benefits to all.

Good News for Business Owners:
The Safe Harbor Match is tax-deductible for a company that takes part in the plan. A business owner has the ability to contribute the maximum annual deferral amount to their 401(k) plan ($19,500 for 2020 in addition to any catch-up contributions), they can also receive additional savings from the company’s matching contributions (as the company is also an “employee”), and further, the company can also deduct all their matching contributions at tax time (up to the IRS limit of $57,000).

Good News for Employees:
The Safe Harbor 401(k) Plan allows all employees to contribute the maximum allowable amounts to their 401(k), including the employer, which is essentially a tax-free bonus for them. This is a tremendous incentive for employees to save for their future retirement.

Is the Safe Harbor 401(k) Plan Right For You?

Overall, a well-designed 401(k) plan can help a business not only recruit, but retain its employees. However, navigating through all the pros and cons of any retirement package, including the Safe Harbor 401(k) plan, can be difficult for any company to decide if it’s the right fit. If you would like to decide if the Safe Harbor option is right for you or to see how the Safe Harbor plan can benefit your company, contact us today!

Have more questions about retirement administration? Schedule a plan discussion with us or take 30 seconds to find which plan is best for your company with the retirement plan evaluator.

1. What Is a Safe Harbor 401(k) and Why Is It Important in 2019? (2019) By Brian O’Connell. The Street
2. Safe Harbor 401(k) Plans: Everything You Need to Know. (2018). By Vijay Mirpuri. Human Interest Blog