#DC PLAN SAFE HARBOR SERIES#
To show the IRS that a company’s 401(k) plan meets those requirements, the plan has to go through a series of annual nondiscrimination tests that are used to figure out whether or not the plan is fairly balanced. The value of the assets in key employees’ retirement accounts cannot be more than 60% of all the assets held in an entire employer’s 401(k) plan.HCEs also can’t receive more than 2% in employer contributions than what rank-and-file employees are receiving on average as a group.Highly compensated employees can’t contribute more than 2% of the average of all other workers who are eligible to participate in the company’s retirement plan.These tests compare both plan participation and contributions of rank-and-file employees to owners and managers to make sure the plans are fairly benefitting both groups.Īccording to the IRS, there are three general nondiscrimination rules traditional 401(k) plans must follow: We’ve mentioned these “nondiscrimination” tests a couple times already, but what exactly is the deal here?īasically, Uncle Sam wants to make sure that 401(k)s are set up in a way that doesn’t favor highly compensated employees (HCEs) over everyone else. Small-business owners and employees love the safe harbor option because it makes it easier to meet the rules set by the government and workers get some kind of contribution to their retirement plans.
Why? Because if their highly compensated employees and key employees invest too heavily into the company’s retirement plan, there’s a chance the plan might not pass those nondiscrimination tests, which could lead to some costly consequences! Safe harbor plans are especially valuable for small businesses with fewer than 100 employees. But here’s the catch: Safe harbor plans require mandatory employer contributions and immediate vesting for employees (that means all employer contributions given to employees belong to the employees the moment those contributions hit their account). Let’s learn more about safe harbor 401(k)s and why they might be a great retirement plan option for your company!Ī safe harbor 401(k) is a type of retirement plan that allows small-business owners to avoid the IRS’s annual nondiscrimination testing. Nope, we’re not talking about retirement plans just for sailors or fishermen! Safe harbor 401(k)s are retirement plans designed to protect companies (small businesses, in particular) from getting in trouble with the IRS. That’s where the safe harbor 401(k) comes in to play. Maybe you’ve already set up a 401(k) plan at your workplace, but all the tests and hoops you have to jump through to meet the IRS’s rules and standards are driving you nuts. One of your many responsibilities as a small-business owner is to find the best way to help your employees save for retirement. Employers usually match 100% of the first 1% of contributions and 50% of deferrals between 1% to 6% of compensation.If you are a small-business owner, you are the backbone of the American economy-and we salute you! There is also a requirement for an auto-increase of 1% per year until the deferral rate reaches 6%. QACA safe harbor: Standing for qualified automatic contribution arrangement, QACA plans feature automatic enrollment that puts aside 3% of a worker’s compensation in the 401(k) plan unless they opt out.Typically, they provide a 100% match of up to 4% of an employee's compensation. Enhanced safe harbor: As another type of elective plan, enhanced safe harbor 401(k) plans meet or exceed what is offered in a basic plan.“This design can allow for … additional benefits to business owners and identified employees who the business owner wants to receive added benefits,” Recker says. Nonelective safe harbor: With these plans, employers make a 3% retirement contribution for all workers, regardless of whether they choose to participate in the plan.Basic safe harbor: Also known as an elective safe harbor, this plan will match 100% of contributions up to 3% of an employee's compensation and then 50% of an employee's additional contributions, up to 5% of pay.
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