Similar to any 401(k)-retirement savings plan, the matching contributions in a safe harbor plan are tax-deductible for the employers.

What is a Safe Harbor 401(k) Match?

Employers sponsor 401(k) retirement savings plan to attract and retain employees. The main aspect of these plans is that they allow employees to contribute to their own retirement savings account, but at the same time, the employers are required to match a certain percentage or dollar-for-dollar amount as a bonus. Employers can contribute to the safe harbor plan by choosing either basic matching or enhanced matching or selecting non-elective contributions. You can find additional information on how which matching works best from providers such as Ubiquity.

Harbor Match

Benefits of having a Safe Harbor 401(k) Match

Traditional 401(k) plans do not require matching. Most traditional employers match 50 cents to a dollar on up to 6% of the employee’s pay or, in some cases, dollar-for-dollar up to 3%. Matching is mandatory for safe harbor plans, but here are the benefits of it.

  • Adding a safe harbor plan to your 401(k) allows your employees who are highly compensated to maximize their retirement contributions.
  • It exempts your 401(k) plan from IRS-regulated annual compliance testing.
  • It helps you and your highly compensated employees optimize your personal retirement savings since you can contribute the maximum amount to your 401(k) plan.
  • The employee’s taxable income is reduced as the employer contribution is tax-deductible.

Compliance Tests you can avoid with Safe Harbor 401(k) Plan.

IRS requires businesses to pass the nondiscrimination tests annually to confirm that all company employees are treated fairly and provided an equal chance for a retirement savings plan.

  1. Actual Deferral Percentage Test (ADP): The ADP test requires that those employees compensated more than $125,000 or more than 5% stake in the business, limit the compensation percentage they can defer into their 401(k) plan. Small businesses with low employee participation in 401(k) are affected by this test as it allows ADP of employees who are highly compensated for being no more than 2% higher than other employees.
  2. Actual Contribution Percentage Test (ACP): The ACP test is similar to ADP but considers the employer contribution specifically to ensure that the employers match all the employees proportionately.
  3. Top-Heavy Test: This test ensures that key employees such as owners and high-level executives cumulatively hold less than 60% of the 401(k) plan’s total balance.

You can avoid these tests by the safe harbor 401(k) plan since its features automatically pass these tests if the company contributions remain within certain parameters.

Is Safe Harbor 401(k) plan right for your business?

A safe harbor 401(k) plan is best suited for your business if:

  • Your company or business is a recent startup or is particularly small.
  • You are looking for a hassle-free administration.
  • Your company has failed the IRS non-discrimination annual testing in the past.
  • Your company has a low level of engagement employees who are not highly compensated.

Therefore, you can benefit from a Safe Harbor 401(k) plan if you want to retain your employees and provide incentives to the highly compensated employees through generous profit-sharing contributions.