A 401(k) safe harbor plan resembles a traditional 401(k) plan. For instance, in both plans, the employees can deposit pre-tax funds for their retirement and their employers can also contribute matching funds. However, with a traditional retirement plan, the companies must undergo an annual non-discrimination regulatory testing by the IRS to prevent the company plan from treating highly compensated employees more favorably than the rest. Moreover, the testing process is very onerous and complex.
How the Safe Harbor 401k plan works
This retirement plan, as provided by the financial advisers at Ubiquity, allows the company to avoid the yearly IRS testing and restrictions on employee saving by providing the same contributions to every employee regardless of their salaries, titles, and years they’ve worked at the company.
Furthermore, all those funds vest immediately, which is an important benefit to the employees, who can access the contributions if they decide to exit the company. Therefore, it is different from traditional retirement plans, where the contributions of the employer to the retirement plan vest over time. Thus, the employees need to stay in the company for a couple of years in order to get the maximum value of the employer match and if they exit the company before the employer contributions or match have vested, they may lose the funds.
The safe harbor retirement plan is suitable for both small and big companies. For small companies, making the match contributions may be worth it to avoid the onerous yearly nondiscrimination testing. For big companies, giving all employees the same contribution may be expensive but highly paid employees can make bigger contributions without breaching IRS rules.
Additionally, employees would like to have higher retirement plan contributions and the capability to optimize their plan contribution amounts, which will enable them to have more money for long-term retirement savings. Thus, when businesses create this retirement plan, they do not only attract but also retain highly skilled employees.
Requirements for the safe harbor match
The employer must fulfill the requirements by making contributions that vest as soon as possible. Furthermore, the company can contribute to the employees’ retirement accounts in either of the following ways:
Non-elective
The company will contribute an equivalent of 3% of the employee’s annual salary, which will vest immediately. The employee will receive the funds whether they are contributing to the plan or not.
Basic
The company will offer full matching for the first 3% of the employee’s contribution to their retirement plan, and a 50% match for the next 2% of the employee’s contribution.
Enhanced
The company will offer a 100% matching for all employee contributions, up to four percent of the employee’s annual salary.
Conclusion
In conclusion, this retirement plan is beneficial for both the employees and businesses. It can help company owners or high-level managers who have not been setting funds aside in a company retirement plan to catch up. It can also help highly compensated employees like company owners and executives to save more than the traditional retirement plan would normally allow, and their companies will provide a contribution to their retirement plan which vests immediately.
