Introducing the QACA Safe Harbor 401k

Introducing the QACA Safe Harbor 401k

As an employer, there are two general goals attempting to be met when starting a retirement plan.  Either to retain and recruit high quality employees, or to save money on taxes while saving for your own retirement.

For most, the Safe Harbor 401k is an easy way to accomplish these goals simultaneously.

It allows you to maximize your contributions while offering a robust retirement plan for your employees.

There is one big flaw to the Safe Harbor, however.  The match is instantly vested, which means your employees could leave and take your match with them.

Introducing the QACA Safe Harbor 401k

QACA Safe Harbor 401k is actually two separate concepts. QACA is an acronym for Qualified Automatic Contribution Arrangement. As the title implies, the program automatically enrolls employees in a 401k plan. 

The Standard Safe Harbor 401k, on the other hand, is essentially the 401k retirement plan with an automatic pass on the ADP, ACP, and top-heavy non-discrimination tests.

A QACA Safe Harbor 401k, consequently, is a retirement plan into which employees are automatically enrolled. 

It has great benefits for all parties involved – especially the employer!

Standard Safe Harbor vs. QACA Safe Harbor 401k 

A standard Safe Harbor 401k bears some similarities to a QACA, but there also exist some distinct differences in the number and types of requirements:

Vesting Schedule

As mentioned above, one downside to the standard Safe Harbor is that the employee could walk away with your match immediately after receiving it.

The QACA is the solution to this problem.  It offers a 2 year “cliff” vesting schedule. 

This means that the employee needs to stay with the company for 2 years before walking away from the company with your generous match.  This a great incentive to retain quality employees for a longer period of time.

Matching Contribution 

The standard Safe Harbor 401k plan offers employers two options for matching contributions. 

  1. The first is a basic match of 100% on the first 3% of the deferred compensation, plus a 50% match on subsequent deferrals totaling 4%. 
  2. The second option is an enhanced match of 100% on the first 4% of deferred compensation — the rule is that the enhanced match must be at least as generous as the basic match.

The QACA Safe Harbor, on the other hand, requires a match of 100% on the first 1% of deferred compensation, followed by a subsequent 50% compensation deferrals totalling 3.5%.

This difference also incentivizes the employee to contribute more towards the plan in order to get the match.

Default Deferral Rate 

While the standard SH 401k does not have deferral rate requirements, the QACA does.

Due to the auto-enrollment, your employees will automatically be enrolled into the plan.  The minimum requirement is 3% and has a maximum of 10% for the first year of participation.

If you have employees who don’t want to participate, they will simply need to opt-out of the plan.

Benefits of a QACA Safe Harbor 401k

A QACA SH 401k plan has benefits for all parties involved. Notable benefits include:

  • It bolsters participation in the retirement plan.
  • Allows the employer to maximize their contributions towards their own retirement.
  • Gives employees an incentive to stay with your company longer.
  • It protects businesses against anti-discrimination testing.
  • Employees can benefit from tax deferral.

Another notable benefit of a QACA Safe Harbor 401k plan is that employers who implement a plan will receive an additional $500 in tax credits, alongside the $5,000 they receive for the first three years by implementing a plan. 

This is guaranteed under the SECURE Act, which was enacted in late 2019.

If you need help finding which plan makes sense for your company, schedule a plan discussion with us or take 30 seconds to find which plan is best for your company with The Retirement Plan Evaluator.

Should You Offer a 401k Plan or Health Plan First?

Should You Offer a 401k Plan or Health Plan First?

As an employer, making the decision whether you should choose a 401k plan or a group health plan can be a difficult one.

Employees have similar characteristics like consumers, and they value benefits from the company they choose to work for. 

Before accepting a job, most employees will weigh the various employee benefits that are indispensable to them.

Retaining the best taskforce in your business requires you to pull out all the intrinsic stops to encourage them.  But, how do you determine which employee benefit to adopt first?

401(K) Plan or Group Health?

Stable retirement and viable health insurance plans are both paramount for your employees. Diligently selecting the best plan ensures that you retain your best employees and motivate them to be more productive.

How Important is Group Health Insurance?

A report by the Bureau of Labor Statistics indicates that 69% of employees in the private sector have access to health insurance. Arguably, group health insurance is a crucial benefit in any organization.

Since medical costs are incredibly costly, employees want assurance of a reliable group health insurance plan.  A plan that covers their spouses and family will boost their morale of working in your organization.

Pros of Group Health Insurance

  • Attracts top talent taskforce to your organization
  • Protect the employees, employers, and their families
  • Straightforward to claim
  • Your company enjoys specific tax advantages.
  • Your employees take advantage of subsidized group rates.
  • The insurance costs are tax-exempt.

Cons of Group Health Insurance

  • The process of applying for group health insurance is complicated.
  • Does not cover retired employees
  • Costly for small organizations
  • Offering group health might affect your employees negatively

Should you a adopt 401(K) plan?

A 401(k)plan is a sponsored retirement account where your employees contribute a specific amount. The retirement strategy offers employees retirement wealth.  Employees contribute a variable amount of money as dictated by the IRS.

Pros of 401(K)

  • It is a tax-advantaged retirement saving plan.
  • Motivates employees to be more productive
  • Hassle-free payroll deductions.
  • Employees have control of their contribution levels.
  • Considerable tax advantages for the employer

Cons of 401(K)

  • Requires administration and compliance support.
  • The investment choices are static.
  • The IRS limits the amount employees can save.

If you need help finding which plan makes sense for your company, schedule a plan discussion with us or take 30 seconds to find which plan is best for your company with The Retirement Plan Evaluator.

Should you choose a 401k plan or a group health plan?

Ask Your Employees

Involving your employees in decision making is integral in making the right decision. Ask your employees which employee benefit intrigues them the most.  

Every employee is in a different situation, but if you are to only adopt one plan, it’s best to keep their interests in mind

Look at the Demographics of Your Employee

Your employee’s age, family dynamic and gender might also help decide which plan is best for your company.  

If most of your employees are younger and still on their parent’s health plans, then going with a 401(k) plan might be best.

On the other side of the coin, if they all have families and insurance is a top priority for them, maybe a health plan is better suited for your workforce.

Either way, it’s best not to guess.

If you need help finding which plan makes sense for your company, schedule a plan discussion with us or take 30 seconds to find which plan is best for your company with The Retirement Plan Evaluator.

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Which One Is Best?  SEP IRA vs. Solo 401k

Which One Is Best? SEP IRA vs. Solo 401k

The number of self-employed Americans is rising by the day. According to Gallup, 30% of American workers were self-employed. 

Being self-employed doesn’t mean you’ll fail to benefit from the tax benefits that formal employees get as conventional retirement plans. There are two outstanding alternatives: SEP IRAs and Solo 401(k) plans. 

They both have matching advantages, but their few differences are what make one better for you. 

What is a SEP IRA?

Simplified Pension Individual Retirement Account (SEP-IRA) applies for self-employed and small business owners and employees.  It allows you to contribute to your retirement savings with your employees doing the same. 

Your contributions are tax-deductible, and your money grows without being taxed. 

How is a SEP IRA Calculated?

You can contribute to a SEP-IRA annually.  For 2020, the contribution limit is $57,000, equivalent to 25% of the employees’ compensation for the year. 

In 2021, it stands at $58,000. That means the limit on the compensation you can use is $285,000 in 2020 and goes up to $290,000 in 2021. 

What is Solo 401k?

A solo 401(k) is a 401(k) plan limited to self-employed individuals. Spouses who work for them at least on a part-time basis may be eligible to contribute as well. 

If you run a small business with an employee who is not your spouse, you may not be eligible to save for retirement in a Solo 401(k) plan. 

It lets you make the after-tax Roth contributions. You also save more at a lower cost. 

How is the Solo 401k Plan Calculated?

If you’re below 50 years, you can contribute a maximum of $57,000 in 2020. If you’re above 50 years, you can contribute a maximum of $63,000.

However, your first $19,500 can be contributed up to 100% of your compensation.  After that, the calculation is the same as a SEP IRA.  But, it can be stacked.

For example, if you earn $100,000 and under 50 years old, you can contribute $19,500 as an employee of your own company.  

In addition, you are able to contribute towards the employer portion, or profit sharing.  This is an additional $25,000 (25% of $100,000) with a total of $44,500 for 2020.

Which is the best between a SEP-IRA and Solo 401 (k)?

 

If you’re self-employed, Solo 401 (k) is the best option since its potential tax saving is higher. It also offers more-on par with other employer-sponsored retirement plans that SEP doesn’t offer. 

For instance, you can take out a loan from your Solo 401(k) of $50,000 and below or 50% of your account balance.  It offers catch-up contributions if you’re aged 50 and above and the Roth option. 

Roth option helps you pay income tax in exchange for withdrawals retirement that is tax-free.

If you need help finding which plan makes sense for your company, schedule a plan discussion with us or take 30 seconds to find which plan is best for your company with The Retirement Plan Evaluator.

401k 101:  What is a vesting schedule?

401k 101: What is a vesting schedule?

401k’s are a great way for employees to save up for retirement, and part of being a successful business owner is to understand how they work. 

One aspect of 401k’s you should be familiar with is “vesting”.  This article will give a brief outline of vesting and its role in your business. 

If you would like more information about vesting or any other aspect of 401k’s, the experts at lifeincrs are here to advise you.

How does vesting work?

When your employee pays into their 401k you have the option to match it, either fully or a percentage. 

Whatever an employee contributes to their 401k, of course, is theirs immediately. 

However, the employer may choose to not make their matched funds immediately available, instead requiring that an employee spend a certain amount of time at the company before they have access to them. This is known as vesting.

To say an employee is “fully vested” means they have access to all the funds their employer has put into their 401k. If an employee leaves before they’re fully vested, they will forfeit the non-vested funds.

Vesting Schedules

Often, employers will set up a schedule that allows employees to become incrementally more vested in their matched funds year by year. 

For instance, if an employer puts $5,000 into an employee’s 401k and they vest the matched funds at a rate of 20% per year of employment, they would gain access to $1,000 of matched funds every year, becoming fully vested in the fifth year.

Safe Harbor 401k’s

A Safe Harbor 401k plan is a specific kind of 401k setup that allows businesses to avoid burdensome IRS compliance tests

However, when using one of the Safe Harbor options, the employer will need to choose from pre-approved IRS matching and vesting schedules. 

This may or may not align with the company’s goals.

Consider using our Retirement Plan Evaluator to see if a Safe Harbor makes sense for your company.  Or, connect with one of our experts for a free consultation.

Why Your Employees Are Getting Money Back From Your 401k

Why Your Employees Are Getting Money Back From Your 401k

If some of your employees are receiving refunds from your company’s 401k plan, chances are your plan failed the annual IRS required compliance (nondiscrimination) tests.

Although 401k plans have emerged as one of the most popular retirement plans in the US, they still come with a complex set of rules that can limit some businesses, caused by the nondiscrimination rules.

401k refunds or corrective distribution are a headache for plan sponsors like you and employees alike.

The Why of Non-Discrimination Testing

The IRS tests on your plan provide for equal tax breaks to all participating employees, both the highly compensated employees (HCEs) and non-highly compensated employees (NHCEs). 

Although your HCEs may be willing and able to contribute more, the IRS requires that both the HCEs and the NHCEs contribute to the 401k plan at similar rates.

There are several tests conducted on your plan. They include

  • ADP testing (actual deferral percentage) analyzes the average of your salary deferral percentages for HCEs and NHCEs
  • ACP testing (actual contribution percentages) tests employers matching contribution
  • The top-heavy test looks at the amount HCEs contribute to the plan as contrasted to everyone else

Consider using our Retirement Plan Evaluator to see if a Safe Harbor makes sense for your company.

Refund Deferrals

If your plan fails the ADP and ACP tests, take corrective action for your plan during the statutory correction period to cause the test to pass. 

You have two-and-a-half months after the end of the plan year being tested to correct excess distribution with the excess contribution distributed any time during the 12 months period of the plan. 

After the 12 months, you can correct this by making a qualified nonelective contribution to the plan for NHCEs.

Consider a Safe Harbor 401k

A safe harbor plan dispenses the need for nondiscrimination testing. They automatically pass the ADP and ACP tests when safe harbor plan requirements are met, which are certain contributions and participant notices.

There are three variations of the safe harbor plan, which require the employer to make one of the following contributions to the plan

  • Basic matching
  • Enhanced matching
  • QACA safe harbor match

Additionally, it requires that all safe harbor matching contributions be 100% vested.

Conclusion

If your plan fails the testing, get your plan advisor and record keeper to come up with a plan to address the problem. It’s equally crucial to consider factors beyond cost by considering a safe harbor plan for your business.

Have more questions about how to pass your annual testing requirements? Schedule a plan discussion with us or take 30 seconds to find which plan is best for your company with Evaluator.

Safe Harbor 401(k) Plan Deadlines

Safe Harbor 401(k) Plan Deadlines

For many small business owners, establishing a Safe Harbor 401k plan is beneficial and is a choice worth looking at as it provides excellent tax and retirement benefits for both the employer and employee. 

By having a great retirement plan for your employees, you demonstrate your investment in their future, which will help you recruit and retain the best talent in the industry. 

Safe harbor deadlines are the one thing to look out for so that you don’t miss out and have to wait another year.

What’s the Purpose of a Safe Harbor 401k Plan?

As an employer, you already know that offering a 401k makes it easier for you and your employees to save more for retirement. 

The government wants to ensure everyone takes part meaningfully and benefits from the plan their employer offers.  And, as a result, the IRS has set up a series of nondiscrimination tests designed to measure whether a 401k favors ownership and highly compensated employees (HCEs).

A safe harbor 401(k) is a program designed to avoid annual nondiscrimination testing of employees’ elective contribution and employers matching contribution that’s required in a 401(k) plan.

There are two types of Safe Harbor 401(k)s; Standard Safe Harbor and QACA Safe Harbor.

Safe Harbor Deadlines

Time is of great essence when considering a safe harbor 401k plan. 

To implement a new safe harbor 401k plan, remember October 1st is the final safe harbor deadline day. 

Still, consider starting earlier than that, given you need time to send a notice of 30 days to your employees before the deadline day since you’re making a matching contribution and a few more days for initial coordination.

Essential dates when starting a new safe harbor 401k plan

  • By August 15th, set up your guidelines for safe harbor 401k.
  • By September 1st, give a 30-day notice to employees for a safe harbor matching plan
  • On October 1st, the safe harbor 401k plan is effective and exempt from nondiscrimination testing

Essential dates for an existing 401k plan

  • November 30th request the addition of a safe harbor matching provision to your existing 401k plan
  • By December 1st, send a 30-day notice to your employees
  • On January 1st, the safe harbor 401k matching takes effect and spare the plan from nondiscrimination

Is a Safe Harbor 401k Plan Right for You?

A safe harbor 401k plan is an excellent choice if your business plans to match employees’ contributions and don’t want to worry about nondiscrimination testing. 

The safe harbor 401k includes significant tax savings, and your employees will be happier. 

On the flip slide, it will increase your overall payroll depending on the amount of participation.  Small businesses should weigh the pros and cons of the safe harbor 401k before going that way.

If you need help finding which profit sharing plan makes sense for your company, schedule a plan discussion with us or take 30 seconds to find which plan is best for your company with The Retirement Plan Evaluator.