How Your Employees Benefit from Safe Harbor 401k

Do you have a 401k plan set up for your employees? Are you wondering how you can ensure that your plan is fair and legal?

If you answered yes to either of these questions, you should consider a Safe Harbor provision for your 401k plan.

The Safe Harbor provision ensures that your business will never be sidelined by an IRS fine by structuring your plan in such a way that you automatically pass the IRS tests every year. 

Want to learn more? Read on!

IRS Compliance Testing

When it comes to 401k plans, the government is concerned with the fairness of plans and how workers are treated. Specifically, the IRS does not want to see a plan that heavily favors high earners within a company and is unfair to lower-wage earners. Companies that provide unfair incentives to highly paid workers while not offering the same benefits to lower wage earners will often get in trouble for these practices.

In order to make sure that this is not the case, the IRS will run three tests each year. They are known as the ADP test (Actual Deferral Percentage), the ACP test (Actual Contribution Percentage), and the Top Heavy Test. While these tests differ slightly, they all essentially make sure that no one within your company is being treated unfavorably, especially those who earn the least in salary.

Failure of one or more of these tests leads to terrible consequences for businesses. Paperwork and fines can pile up and correcting the issue can take weeks or months.

Luckily, by implementing a Safe Harbor plan, you can avoid this issue altogether.

Safe Harbor 401k Plans

Safe Harbor plans are structured in such a way that businesses automatically pass these three tests without taking any further action. This is accomplished by structuring plans in one of the following ways:

  1. Matching Contributions.

By choosing either a basic or enhanced match, the business owner matches an agreed upon percentage of what an employee contributes. This can be modified slightly depending on the specific needs of a business. 

  2. Nonelective Contributions.

Nonelective contributions are an interesting option. When businesses choose to use nonelective contributions, the business owner makes contributions to every employee’s plan even if said employees haven’t contributed themselves.

Whichever method you choose for your business, you’ll rest assured that you won’t have to deal with the fallout from failing one or more of the IRS tests.

Safe Harbor Deadlines

If you are interested in setting up a Safe Harbor 401k for your business, don’t delay!

All new Safe Harbor plans must start on or before October 1st, 2022. However, if you simply want to add a Safe Harbor provision to your 401k plan, you have until November 30th, 2022. Either way, the clock is ticking! Make sure you don’t miss the deadlines, or you’ll have to wait another year to start your plan. Contact a plan provider like Ubiquity today and give your employees a great retirement plan.